[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





                          MATCHING CAPITAL AND

                     ACCOUNTABILITY--THE MILLENNIUM

                           CHALLENGE ACCOUNT

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                       DOMESTIC AND INTERNATIONAL
                 MONETARY POLICY, TRADE AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 11, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-36



90-109              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 B.A.RNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. B.A.KER, Louisiana        MAXINE WATERS, California
SPENCER B.A.CHUS, Alabama            CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice         JULIA CARSON, Indiana
    Chairman                         BRAD SHERMAN, California
RON PAUL, Texas                      GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio                B.A.RB.A.RA LEE, California
JIM RYUN, Kansas                     JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSELLA, New York               CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE B.A.CA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey             
TIM MURPHY, Pennsylvania             BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM B.A.RRETT, South 
    Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director

               Subcommittee on Domestic and International
                 Monetary Policy, Trade and Technology

                   PETER T. KING, New York, Chairman

JUDY BIGGERT, Illinois, Vice Chair   CAROLYN B. MALONEY, New York
JAMES A. LEACH, Iowa                 BERNARD SANDERS, Vermont
MICHAEL N. CASTLE, Delaware          MELVIN L. WATT, North Carolina
RON PAUL, Texas                      MAXINE WATERS, California
DONALD A. MANZULLO, Illinois         B.A.RB.A.RA LEE, California
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
JOHN B. SHADEGG, Arizona             BRAD SHERMAN, California
MARK R. KENNEDY, Minnesota           DARLENE HOOLEY, Oregon
TOM FEENEY, Florida                  LUIS V. GUTIERREZ, Illinois
JEB HENSARLING, Texas                NYDIA M. VELAZQUEZ, New York
TIM MURPHY, Pennsylvania             JOE B.A.CA, California
J. GRESHAM B.A.RRETT, South          RAHM EMANUEL, Illinois
    Carolina
KATHERINE HARRIS, Florida


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 11, 2003................................................     1
Appendix
    June 11, 2003................................................    33

                               WITNESSES
                        Wednesday, June 11, 2003

Larson, Hon. Alan, Under Secretary of State for Economic, 
  Business and Agriculture Affairs, Department of State..........    10
Natsios, Hon. Andrew, Administrator, United States Agency for 
  International Development......................................    11
Taylor, Hon. John, Under Secretary for International Affairs, 
  Department of the Treasury.....................................     8

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    34
    Larson, Hon. Alan............................................    36
    Natsios, Hon. Andrew.........................................    45
    Taylor, Hon. John............................................    53

 
                          MATCHING CAPITAL AND
                     ACCOUNTABILITY--THE MILLENNIUM
                           CHALLENGE ACCOUNT

                              ----------                              


                        Wednesday, June 11, 2003

             U.S. House of Representatives,
        Subcommittee on Domestic and International,
                                    Monetary Policy
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:14 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Katherine Harris 
[acting chairwoman of the subcommittee] presiding.
    Present: Representatives Ose, Kennedy, Feeney, Hensarling, 
Barrett, Harris, Maloney, Watt, Waters, Lee, Sherman, Frank (ex 
officio), Baca, and Crowley.
    Ms. Harris. [Presiding.] The hearing of the Subcommittee on 
Domestic and International Monetary Policy, Trade and 
Technology will come to order.
    Without objection, all members' opening statements are made 
part of the record.
    This morning's hearing provides us with an outstanding 
opportunity to learn about President Bush's historic initiative 
to comprehensively reform our nation's financial assistance to 
the developing world.
    We are fortunate that several of the Bush Administration's 
distinguished leaders have joined us to explain how the 
President's Millennium Challenge Account, the MCA, will achieve 
this objective.
    Treasury Secretary John Snow appeared before the full 
Financial Services Committee in May to describe the 
Administration's international economic policies. The MCA 
played a prominent role in his testimony. I look forward to 
hearing specific examples that will illustrate the vision he 
outlined during this morning's testimony.
    On behalf of Chairman Oxley, I wish to express our 
appreciation to the Honorable John Taylor, Under Secretary for 
International Affairs in the Department of the Treasury; the 
Honorable Alan Larson, Under Secretary for Economic, Business 
and Agriculture Affairs at Department of State; and the 
Honorable Andrew S. Natsios, the Administrator of the Agency 
for International Development, for their insights.
    The Millennium Challenge Account is aptly named. Helping 
eligible countries help themselves presents them and us with an 
extraordinary challenge. Eligible nations can prompt the 
challenge of improving their governance, investing in their 
people and promoting economic freedom. We face the challenge of 
helping them succeed while holding them accountable. We believe 
that the construction of thriving, prosperous societies is 
inseparable from good leadership, economies based upon sound 
market principles and major investments in health and 
education.
    In short, for a country to be successful, its people must 
be successful. As illustrations of this axiom, Americans can 
point to our own experience, as well as to the transformations 
that have occurred in South Korea, Chile and Botswana.
    The MCA constitutes a bold initiative that demands 
responsibility, transparency and accountability. It builds 
upon, rather than detracting from, our other bilateral and 
multilateral aid programs. It represents a way forward, not 
backward. It creates a model of interagency corporation without 
a bloated new bureaucracy, relying upon the expertise of the 
Departments of Treasury and State, as well as the Agency for 
International Development. I understand that the Office of 
Management and Budget will serve in the corporation as well.
    The challenge is not just extended to the applicant 
countries, but also to our government guiding this process 
forward. The jurisdiction of the Treasury Department, 
International Finance and Multilateral Development Banks, I am 
particularly concerned how coordination is undertaken so that 
duplication of efforts or overlapping is avoided.
    Like any sound investment strategy, the MCA is based upon a 
long-term outlook. The President takes a positive step forward 
by proposing $1.3 billion for the MCA in its first year and 
ramping up to $5 billion by its third.
    The Administration and our taxpaying constituents can rest 
assured that Congress will be very involved in this process. 
Sixteen performance indicators proposed by the Administration 
will gauge just how seriously committed countries are to ruling 
justly, investing in their people and promoting economic 
freedom.
    With indicators from regulatory quality, to political 
rights, to public expenditures on health and primary education, 
the range of indicators is expansive and objective. We are 
talking about routing out corruption, establishing respect for 
human rights and adhering to the rule of law, as well as 
investing in better schools and health care.
    These are long-term solutions and goals, but with the 
leadership of an MCA corporation, I am confident that applicant 
countries, which develop successfully, will provide a strong 
civil society and a sound, market-driven economy to guide 
future international development.
    Thank you again for your testimony today, and I look 
forward to your comments.
    Are there additional opening statements?
    Mrs. Maloney. I thank the Chairlady for yielding.
    And I thank very much our witnesses, Mr. Taylor, Mr. Larson 
and Natsios, for being here.
    And I just want to share with you, I just came from a Joint 
Economic Committee, where I submitted the Freedom From Debt Act 
legislation that I will be introducing today to require the 
United States to negotiate in the IMF, World Bank and other 
appropriate multilateral development institutions for the IMF 
and World Bank to relieve the debt owed by Iraq to these 
institutions.
    And I feel that this is in line, really, with many of the 
MCA's priorities and challenges, and certainly would benefit 
the Iraqi people. So I will be forwarding a copy of this 
legislation to you to see and discuss with the Administration, 
and I am hopeful that you will be supportive in a bipartisan 
way.
    I very much look forward to your testimony today. And in 
reviewing the MCA, I think the goals are laudable. It is very 
important, but basically, I would like to see more of an 
emphasis or inclusion in it on women, children, families, and, 
I would say, reproductive health, all of which are very much 
tied to the stability of countries, the environment and, 
really, the health and well-being of families. If you have a 
strong family, you have a strong village. If you have a strong 
village, you have a strong country.
    But I would, in a broader way, just like to thank this 
Administration for their increasing commitment to increasing 
foreign aid to the world's poorest nations. This is truly a 
historic step, and if fully implemented, is one of the largest 
increases in foreign-aid spending in the past 50 years. 
Clearly, we need full funding and a full commitment to getting 
the aid to those countries who need it most.
    I look forward to hearing about the concept of the program 
and the criteria for country eligibility. I agree that it is 
important to discuss the political and economic development 
when we discuss indicators for aid recipients. However, I 
notice one area that is directly related to economic 
development which is missing from this debate: demographic 
change.
    October 12, 1999, was designated by the United Nations as 
the day the Earth's population would reach 6 billion. By 
reaching the global milestone of 6 billion was a testament to 
the significant progress we have made in improving the quality 
of life for each of the world's citizens, one-third of the 
world's people still face a world of poverty, poor health and 
pollution.
    As the third most populated country on Earth, I strongly 
believe that the United States must affirm its status as a 
world leader and meet its financial responsibilities. The needs 
of 6 billion people cannot be met unless the United States 
fulfills its promise to help provide population and development 
funding in countries that cannot afford it themselves.
    When we address poverty eradication, we must address access 
to modern contraceptive methods. As Mr. Natsios knows, USAID 
investments in family planning helps stabilize population 
growth in strategically important countries and resulted in the 
creation of strong U.S. trading partners such as Korea, Taiwan 
and Thailand.
    More than 99 percent of population growth is occurring in 
the developing world, where population pressure is contributing 
to deforestation, water and food shortages, global warming, 
wildlife dying and other environmental concerns.
    Expanding populations undermine developing-country efforts 
to provide citizens with adequate health care, food, education 
and jobs. These conditions slow economic and social 
development, thereby jeopardizing the potential for these 
countries to be reliable allies, good trading partners and 
growing markets for U.S. exports.
    Supporting voluntary international family planning 
programs, universal access to reproductive health care and 
other services means stable populations, growing economies, 
improved environmental conditions and a better world for 
everyone.
    We should be considering these issues when we discuss 
performance measures for eligible countries for the Millennium 
Challenge funding.
    And I want to close just with one brief story. I visited 
India once, and I was very much taken by the world's largest 
democracy that had a strong independent court system, a form of 
democracy, and spoke English and an industrious population.
    And I asked the American Ambassador, ``What would be most 
important thing that we could do to help India?'' I just loved 
the country. I thought he would say economic development, I did 
not know what he would say. I was stunned at his answer--and 
this is Ambassador Wristen, and he was a professional career 
ambassador. And his statement was, ``family planning.'' He said 
that women and men and families gathered in lines at villages, 
lined up, asking for support and information about family 
planning.
    So I feel that that should be something that I hope that 
you will consider in the criteria and information that you put 
forward with the MCA accounts. It is a good first start, but I 
think this should be included.
    Thank you.
    Ms. Harris. Are there any additional opening statements?
    Mr. Frank. Madam Chair?
    Ms. Harris. The gentleman from----
    Mr. Frank. Do you have one on the other side?
    Ms. Harris. I did not see anybody from this side.
    The gentleman from Massachusetts is recognized.
    Mr. Frank. Thank you. I appreciate the fact that we are 
having this hearing, and I am delighted that we have this 
really impressive panel of high-ranking officials.
    I think one of the greatest gaps in our international 
policy over the years has been the absence of a forceful and 
sustained economic development strategy. It has been too often 
subordinated to other political considerations. Those are 
important, but they ought to be pursued on their own.
    And alleviating desperate poverty is, first of all, 
important for itself; secondly, because it does, if we are 
successful, create a less unsafe world. I do not think--the 
direct relationship people try to draw between terrorism and 
poverty is clearly wrong. Terrorists are not hungry. They are 
not dealing with poverty. Osama Bin Laden is not a social 
worker and has, as nearly as I can see, no decent instincts at 
all.
    But what happens when you have this sense of despair and 
poverty, I think, is that the climate for terrorism increases. 
That is, more people are supportive, less are willing to join 
in the effort than would be in their own interest.
    So there is a self-interested argument here, but it seems 
to me, you know, we should not denigrate ourselves. We too 
often, when we want to do something because it is the right and 
moral, correct thing to do to alleviate human suffering, we 
think we have to come up with a more instrumental reason. I 
think we ought to acknowledge that the richest society in the 
world's history can spend some fairly small percentage of its 
wealth trying to alleviate desperate poverty, and we will also 
benefit from it.
    I just have a couple of questions, and I mentioned this to 
Under Secretary Taylor, and I hope you will be able to address 
it, and that is: There are criteria, as there should be, but we 
obviously do not want people bouncing in and out. If people 
join in--and particularly I am concerned because the criteria, 
it is a relative thing, you are being graded on a curve here. 
Technically, if a country does the right thing, it qualifies, 
it gets into the program, and it continues to do well, but 
other countries start doing better, its eligibility might be in 
question. And I think we obviously need to have some guarantees 
of continuity.
    Secondly, I did have a concern because I was glad to see 
the criteria. Corruption is an absolute. Human rights and 
freedom is not. And that troubles me some.
    There was a period when we were hoping that economic 
development would, in itself, lead to greater political 
freedom. Sadly, that does not seem to be empirically carried 
out. The People's Republic of China seems to be showing that 
you can progress economically without necessarily progressing 
in human rights. Others in the Asian area seem to, sort of, 
show that as well.
    So I would hope that the human rights and freedom part 
would get a kind of equal treatment. And the notion that, 
technically, theoretically, you could be very bad on those and 
still qualify is somewhat troubling.
    Gentlemen, I welcome the initiative. I look forward to 
being supportive of it, and I think that it has a great deal of 
promise.
    Thank you, Madam Chair.
    Ms. Harris. Thank you.
    Are there additional opening comments?
    The gentleman from California is recognized.
    Mr. Sherman. Thank you.
    I strongly support foreign aid in general and this 
Millennium process in particular. But it will be difficult to 
explain to our constituents why one criteria is missing from 
the proposal, and that is the degree to which the country 
seeking aid has cooperated with us in the war on terrorism.
    Now, there are some countries that, blessedly, are simply 
irrelevant. There are not any international terrorists there. 
We have not asked them to do anything.
    But in the Committee on International Relations, I will be 
proposing, and I hope that this subcommittee generally 
supports, the idea of an amendment to this proposal--and 
perhaps the panelists could focus on this--that would add as a 
criteria the degree to which the country, upon request, if it 
has been requested, has aided the United States in preventing 
international terrorism and apprehending terrorists.
    Otherwise, you may see a circumstance in which a country 
meets all the qualifications, gets a grant or a loan, and has 
refused to extradite, refused to cooperate, refused to trade 
information. And when that happens and that hits the headlines, 
support for further appropriations will shrivel.
    So to think that we can take our desire to help the poorest 
and divorce it from the expectation of our constituents, that 
we will do everything possible to protect them from terrorism--
even if you do not want those two things married, they will be 
married. And best we do it at the outset than do it in an 
unfortunate program development later.
    I yield back. Thank you.
    Ms. Harris. Thank you.
    Are there any additional opening statements?
    Mr. Feeney. Madam Chairman?
    Ms. Harris. Yes, the gentleman from Florida is recognized.
    Mr. Feeney. Thank you, Madam Chairman.
    I am very interested in the Millennium Challenge Accounts 
because of the way it reforms the historic pattern of foreign 
aid in America. The truth is that foreign aid, in terms of the 
effect it has had on the companies that we have worked with, 
historically, in my view, reminds me of Franklin Delano 
Roosevelt's description of the welfare system. And that is that 
it tends to become like a narcotic and creates dependency 
rather than good behavior.
    And to the extent foreign aid has done anything for us 
positively, it has been because of the geopolitical interests 
that we have and basically buying friends for a temporary 
period of time. But even that, ultimately, it seems to me that 
historically the countries we help the most with foreign aid, 
on the long run, turn around and bite the hand that feeds them 
the most aggressively.
    And so there is this inverse, and directly inverse, 
relationship between the amount of money we give countries and 
how bad off they are, in terms of prosperity.
    The nice thing about the Millennium Challenge Accounts is 
that, for the first time, we are going to try to, in a coherent 
manner, tie future behavior to the amount of foreign aid that 
we hope to deliver.
    And it seems to me, what we have done historically is to 
carve out a part of the Americans' prosperity and wealth and 
take money from taxpayers in America and give it to other 
countries. What we want to do here, I think, is to share the 
recipe for success and prosperity that has led us to be the 
shining light.
    And one of the things that I am very interested in is the 
way that we are going to define countries that are moving in 
that direction, because, by definition, the 74 or 75 countries 
that we are talking about participating in this have the worst 
record of creating prosperity.
    So it is going to be very interesting how you incentivize 
people and how you stay on them on a regular basis to do things 
like create a rule of law that respects property rights, both 
real property rights and intellectual property rights. How are 
you going to repeatedly insist on transparency and lack of 
corruption, low marginal tax rates for both investment and for 
earner's free trade?
    For example, we do not give much directly, in way of 
foreign trade, to Hong Kong, Taiwan, South Korea or Thailand, 
but we have given them the recipe for success. They do not need 
foreign aid because they know what it takes to create 
prosperity.
    And finally, I hope that we will address the issue of 
democracy. Hong Kong was hardly a democracy for the last 50 
years, but they finish number one routinely on the Heritage 
Foundation's list of free nations because of their economic 
approach to prosperity. And they now have a higher per-capita 
income than even Great Britain, who was the parent of the 
economic freedom in Hong Kong.
    So, I hope you will basically tell us how we are going to 
change from a system of, in my view, failure in foreign aid to 
maybe success and ultimately weaning these 75 nations and other 
nations off of the burden on American taxpayers.
    Ms. Harris. Excellent.
    Are there any further additional opening statements? Very 
well.
    I would like to welcome a couple of new faces who are 
appearing before this subcommittee and one familiar face. We 
welcome again Dr. John Taylor, Under Secretary of Treasury for 
International Affairs, at the Department of Treasury.
    Dr. Taylor has a very distinguished academic and 
professional record. He received his undergraduate degree from 
Princeton University and his Ph.D. from Stanford University. He 
has taught economics at Columbia, Yale, Princeton and Stanford 
Universities.
    In addition to these academic positions, Dr. Taylor was a 
member of the President's Council of Economic Advisors during 
the Administrations of President George Herbert Walker Bush. 
Moreover, he has also served in the private sector as an 
analyst for Alan Greenspan's Wall Street firm, Townsend 
Greenspan, in the later 1970s and early 1980s, where he studied 
world commodity markets.
    I also welcome Dr. Alan P. Larson, Assistant Secretary of 
State for Economic and Business Affairs. Dr. Larson was sworn 
in as Assistant Secretary of State for Economic and Business 
Affairs in July 1996. Prior to his appointment by President 
Clinton, Mr. Larson served as Deputy Assistant Secretary for 
International Finance and Development. He served in that 
position for more than two years.
    From 1990, Mr. Larson served as America's ambassador to the 
Organization for Economic Cooperation and Development in Paris. 
Mr. Larson has a B.A., MA and Ph.D. degrees from University of 
Iowa. He also attended John Hopkins' School of Advanced 
International Studies.
    We are also pleased to welcome the Honorable Andrew S. 
Natsios, Administrator of the U.S. Agency for International 
Development. Andrew S. Natsios was sworn in on May 1, 2001.
    For more than 40 years, USAID has been the lead U.S. 
government agency providing economic and humanitarian 
assistance toward transitioning and developing nations. 
President Bush has also appointed him special coordinator for 
international disaster assistance and special humanitarian 
coordinator for the Sudan.
    Mr. Natsios is a graduate of Georgetown University and 
Harvard University's School of Government, where he received a 
master's degree in Public Administration. After serving 23 
years in the U.S. Army Reserves, Natsios retired in 1995 with 
the rank of Lieutenant Colonel. He is a veteran of the Gulf 
War.
    Without objection, your written statements will be made 
part of the record. And you will each be recognized for a five-
minute summary of your testimony. We will start with Secretary 
Taylor, then Secretary Larson and Administrator Natsios.
    Thank you.
    Welcome.

      STATEMENT OF HON. JOHN TAYLOR, UNDER SECRETARY FOR 
       INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY

    Mr. Taylor. Thank you very much, Congresswoman Harris and 
other members of the committee, for inviting us to testify. My 
testimony follows that of Secretary Snow, as you indicated in 
your opening remarks, on May 13th, where he described our 
overall international economic policy and the Millennium 
Challenge Account in particular. And we are going to focus on 
the Millennium Challenge Account today, of course.
    I am very pleased to be on this panel with Alan Larson and 
Andrew Natsios. The three of us, and many others in the 
Administration, have worked together since the President 
announced this initiative in March of last year, spent many 
hours working together. I think it is a good example of 
interagency cooperation, and I expect that that is going to 
continue very much as we move into the operational phases of 
the Millennium Challenge Account.
    I want to focus on how the Millennium Challenge Account 
fits into our overall economic strategies, economic development 
strategies, in my testimony.
    As you know, there are 3 billion people in the world living 
in what most Americans would call extreme poverty. The United 
States has worked to combat this problem of poverty in many 
ways.
    This Administration, under President Bush's leadership, has 
developed a new economic strategy--I would call it a growth 
agenda--to deal with the poverty around the world, and the 
Millennium Challenge Account is part of that strategy.
    The strategy is to channel more funds, more resources, into 
countries that are following pro-growth policies, policies that 
we know are essential for reducing poverty--poverty will not be 
reduced unless countries grow more rapidly--but also to channel 
funds in a way that we can measure the results. So it is more 
funds, focused on pro-growth policies, and measuring the 
results that are the driving force behind the policy.
    We are following this policy with respect to the 
multilateral development banks, as this committee knows well. 
For example, we have advocated an incentive contribution scheme 
to IDA, the arm of the World Bank that deals with the poorest 
countries.
    And I would hasten to add that we appreciate the work of 
this committee in moving ahead on the very important 
authorization for IDA, for the Asian Development Fund and the 
African Development Fund, which still are very important for 
our Administration's policy. And we will work with the 
committee as much as it requests in moving ahead with these 
authorizations.
    This pro-growth poverty-reduction agenda is also the 
driving force behind the Millennium Challenge Account. As I 
indicated, poverty reduction requires stronger economic growth.
    And I would focus on productivity growth. Poverty cannot be 
reduced unless workers can earn more, be employed. And they 
earn more by producing more. It is as simple as that. 
Productivity rises because there is more capital, more tools 
for people to work with, for workers to work with, and because 
they have better technology. More tools, better tools, better 
ideas, is how workers can produce more and therefore earn more 
and be removed from poverty.
    As you look around the world, there are barriers to both 
the use of capital, the movement of capital and the transfer of 
technology. Those barriers have to do with poor governance, a 
lack of rule of law.
    A second barrier has to do with poor education, poor 
health, lack of investment in people.
    And the third barrier to the transfer of technology in 
growth and capital is restrictions on economic transactions or 
restrictions on economic freedom.
    The Millennium Challenge Account attacks all these 
barriers. Its strategy is to support countries which do the 
things that will lead to economic growth.
    And as President Bush has said, and as you said in your 
opening, Congresswoman Harris, that is governing justly, it is 
investing in people and it is encouraging economic freedom.
    So what we have done, the people in front of you today and 
many others in the Administration, is worked hard to find 
specific measures of economic performance that fit into these 
three categories that President Bush highlighted.
    What we have looked at, in consultation with many people, 
inside and outside of government, is we have focused on a total 
of six indicators that represent governing justly. Two of those 
indicators come from Freedom House. They measure civil 
liberties, and they measure political rights.
    Four of the indicators, four of those six, come from the 
World Bank Institute. They are indicators that measure voice 
and accountability, the effectiveness of government, the rule 
of law and the control of corruption. Just the things that we 
need to address--countries need to address if they are going to 
increase growth and reduce poverty.
    There are four indicators that have to do with investment 
in people. Two of them focus on the inputs to education and to 
health--that is, the fraction of GDP spent on education and 
health. Two of the indicators focus on measures of output: What 
do you get from your investment in education? What do you get? 
You get completion rates, more kids getting out of elementary 
school and learning things. What do you get for your health 
expenditures? Better immunization rates. So those are two of 
the measures of output that we focused on.
    And then with respect to encouraging economic freedom, 
there is a total of six indicators. Some of them are more 
macroeconomic; some of them are microeconomic. On the 
macroeconomic side, having a low inflation rate, a budget that 
is not in a great deal of deficit. On the microeconomic side, 
countries that find ways that makes it easier to start a 
business, countries that are open to foreign trade, countries 
where regulatory barriers to starting businesses is low.
    So focusing on these indicators, we have tried to put in a 
great degree of objectivity in what the criteria are from 
policies that raise growth.
    What we would like to do is say that countries that are 
above the median in half of the indicators in each category 
would qualify for funds under the Millennium Challenge Account.
    There will be a board, a committee, to make the decisions 
ultimately, and that committee will exercise judgment in using 
these indicators, because no indicator is perfect, no indicator 
is free from some error. So the idea is the committee will 
ultimately make the decisions.
    Ms. Harris. Mr. Secretary, could you----
    Mr. Taylor. And then, finally----
    Ms. Harris. Thank you.
    Mr. Taylor. ----finally, we are going to insist that every 
single contract, every single form of assistance has strict, 
measurable results, where we say what should be done and 
measure what is done in developing the aid.
    So I urge you to support this important legislation, and 
will conclude with that. Thank you.
    [The prepared statement of Hon. John Taylor can be found on 
page 53 in the appendix.]
    Ms. Harris. Thank you.
    Mr. Secretary Larson?

  STATEMENT OF HON. ALAN LARSON, UNDER SECRETARY OF STATE FOR 
ECONOMIC, BUSINESS AND AGRICULTURE AFFAIRS, DEPARTMENT OF STATE

    Mr. Larson. Madam Chairperson, Congresswoman Maloney and 
distinguished members, last March, President Bush caught the 
attention of the world when he called for a new compact for 
global development that would link greater contributions from 
developed countries to greater commitments and responsibility 
from developing countries.
    The Millennium Challenge Account is intended to focus on 
countries that govern justly, invest in the health and 
education of their own citizens, and encourage economic 
freedom. And by focusing on those countries whose own policies 
encourage growth and lasting poverty reduction, the MCA will 
deliver better development results. And for those countries 
that do not initially qualify, it is offering a very, very 
strong incentive to adopt growth-enabling policies.
    The MCA is based on a partnership in which developing 
countries, with a strong involvement of their own citizens, 
would set forth their own development priorities and propose 
MCA-funded activities. The MCA will insist on results. We will 
have business-like contracts with each partner. We will invest 
taxpayer resources only in well-implemented programs that have 
clear objectives and built-in performance benchmarks.
    The MCA will promote economic growth in countries with good 
policies. The private sector will be a focus from the outset. 
And one of the criteria will really be having a healthy climate 
for entrepreneurship, including respect for private property 
and limits that rein in corruption. It is only with strong 
private sector growth that a country will be able to sustain, 
over time, investments in health, education and achieve other 
development gains.
    The MCA will complement and not replace other forms of 
assistance. In fact, President Bush has sought to increase 
other types of assistance programs, including those that focus 
on famine relief, HIV/AIDS or providing help for strategic 
partners.
    MCA activities will be transparent, and they will promote 
accountability. The selection criteria, the board decisions, 
MCA contracts, and program evaluations will all be public and 
will be posted on the Internet.
    To implement this radically new approach, the MCA must be 
administered by a separate corporation with a very focused 
mission. An independent Millennium Challenge Corporation with a 
high-level board will signal that the MCA partnerships are not 
business as usual. A lean Millennium Challenge Corporation 
would be headed by a chief executive officer nominated by the 
President and confirmed by the Senate. The CEO would report to 
a board of directors, chaired by the Secretary of State, 
including the Secretary of the Treasury and the Director of the 
OMB.
    The Secretary of State's participation will help ensure 
strong supervision and ensure coordination in foreign policy 
consistency. The Secretary of the Treasury, among other things, 
is going to make sure that there is consistency with our 
multilateral assistance policies and our foreign economic 
policies. And the Director of OMB, as a member of the board, 
can help ensure that the board implements the President's 
management agenda priorities of increasing and improving 
transparency, performance and accountability.
    The MCA needs a clean and flexible legislative mandate. If 
it is going to respond to developing-country priorities, it 
cannot be earmarked. If it is going to attract the best and the 
brightest personnel in the public sector, the private sector, 
the not-for-profit sector, the MCA must have special personnel 
authority. If it is going to be lean and efficient, it has to 
have the ability to contract broadly for goods and services.
    As the MCA improves itself, we expect that multilateral and 
other bilateral assistance programs will emulate many of its 
core concepts.
    Madam Chairperson, I believe the MCA is the most important 
American assistance development initiative to be advanced in 
the last 32 years. As we fight to defeat terrorism, it is also 
important, in the words of President Bush, to fight for the 
values that make life worth living: education, health, and 
economic opportunity.
    We welcome the strong interest of the Congress, of NGOs and 
of the business community in the Millennium Challenge Account. 
We would encourage the committee to give the Millennium 
Challenge Act of 2003 its full support. And we pledge our 
cooperation in working with the Congress on this important 
initiative.
    Thank you.
    [The prepared statement of Hon. Alan Larson can be found on 
page 36 in the appendix.]
    Ms. Harris. Thank you, Mr. Secretary.
    Administrator Natsios?

STATEMENT OF HON. ANDREW NATSIOS, ADMINISTRATOR, UNITED STATES 
              AGENCY FOR INTERNATIONAL DEVELOPMENT

    Mr. Natsios. Thank you very much, Madam Chairwoman.
    I would like to submit my longer testimony for the record, 
if I could.
    I would like to thank you and the members of the committee 
for holding this hearing on the MCA. For us in USAID, the 
Millennium Challenge Account is the most significant 
development initiative since the establishment of the 
International Cooperation Administration during the Eisenhower 
Administration. We subsequently became the U.S. Agency for 
International Development (USAID) under the Kennedy 
Administration 50 years ago.
    The MCA will provide close to a 50 percent increase over 
current development resources and will firmly reestablish U.S. 
leadership in international development. I might add, with the 
$2.5 billion increase--we are already spending $1 billion on 
HIV/AIDS, but there is a $2.5 billion increase in bilateral 
assistance the President has proposed. So between the 
Millennium Challenge Account and that $2.5 billion increase, 
there is a 70 percent increase over three years in foreign 
assistance, which is clearly large. We actually went back in 
our historical records in USAID, which goes back to its roots 
in the Marshall Plan, and this is the largest increase since 
the Marshall Plan.
    I want to make a second point, and that is that the MCA is 
a direct outgrowth of the single most important lesson coming 
out of USAID's experience, other donor bilateral agency 
experience, the World Bank and the U.N. agencies, and that is 
this: The single most important factor to successful 
development is a country's commitment to good policies that are 
conducive to growth.
    Our experience has confirmed this year after year in 
country after country. And the fact is that it is not the 
quantity of aid that counts. No matter how much money you 
invest in a country, if the country has bad policies, it is 
difficult to make progress. At best, aid can play a supportive 
role. A country's commitment to help itself is a primary 
determinant of success.
    If you have good policies and you invest money, you can 
accelerate the growth process and the process of developing 
sustainable institutions in the society.
    This is the heart of the Monterrey consensus that was 
forged last year and which the MCA embodies by focusing on 
countries that have proven their commitment to good governance, 
investing in people and promoting economic freedom.
    I might add that my own experience--and I have traveled to 
around 80 countries over the last 14 years since I have been 
doing this sort of work--my experience is personally that there 
are reformers in every country in the world. And in some 
countries, those reformers are in charge, driving the country, 
and those are the countries that are making substantial 
progress. In other countries, the reformers are in the 
parliaments or might be in the media or universities, but they 
are not at the center of events, and they are certainly not 
driving them.
    What the MCA does, by creating this criteria, is to give 
these reformers a giant stick. And I can give you one example. 
I recently told a speaker of a parliament in a country that was 
doing very well in all the indicators except one. There were 
huge levels of corruption, and it was damaging the country's 
economic growth. I told that to the speaker. I said, ``I have 
to be very frank with you. You are not going to make it, 
because you just are not doing what is necessary.''
    I recently visited that country, in fact, a few weeks ago. 
I will not tell you the country; I do not want to embarrass 
them. And I asked the speaker when I met with him again. I 
said, ``Have you made progress?'' He said, ``Well, we took what 
you told us, and we beat back the people who have been opposing 
the corruption reforms for the last four years. And the thing 
whizzed through the parliament, because everybody knows in the 
parliament and the government, and all the ministers, what the 
MCA is, and we want to qualify. And if that is what is 
preventing it, we want the reformers in charge instead of the 
people who defended the old order.'' So it is already having an 
effect, and the MCA legislation has not even passed yet.
    The third point I want to make is that the MCA will 
complement USAID's own mission for the existing $10 billion 
bilateral aid program of the U.S. government. USAID has been 
and will continue to play a central role in President Bush's 
campaign to attack poverty by stimulating growth, promoting 
democracy and investing in people.
    But as you know, USAID is only one piece of what is a much 
more complicated and diverse U.S. development strategy. We have 
different challenges now than we did during the Cold War, and 
there are many more actors involved in providing assistance. 
The MCA gives us the opportunity to articulate and implement a 
more coordinated strategy than we have had in the past.
    The MCA will continue to assist a wide range of developing 
countries, but it will allow us to have what we think is a 
complementary relationship to the existing USAID bilateral 
program, which the President has committed will not decline as 
this Millennium Challenge Account increases in size.
    The fourth point is that USAID will reorient its existing 
assistance programs to support and to take into account the 
principles driving the MCA. Basically what we are going to do 
is divide countries that we have presence in--and we have 
presence with USAID officers in 79 countries in the world--into 
four categories.
    The first category is countries which we are investing in 
for purely geostrategic reasons. They are countries that are 
necessary to the protection of the United States' interests in 
sensitive areas of the world. And those countries are primarily 
and almost exclusively financed out of the Economic Support 
Fund (ESF) account, which is controlled by the State 
Department. We administer the programs with that money. But 
those are geostrategic categories.
    The second is countries which just barely failed to make 
MCA status but want to make it. I recently met with a head of 
state in Africa. The country is doing very well in almost all 
of the indicators except a critical one. The head of state 
said, ``Can we get help in correcting these problems so we will 
qualify the second year in this one area?'' So we are going to 
refocus in those countries that almost made it but did not make 
it, and focus our attention on those weaknesses.
    The third is in failed and failing states. We have a $2 
billion program in countries that are not even close to making 
it. The Democratic Republic of the Congo has a central 
government, but it does not control much of the country. There 
is no central government, and there has not been for 12 years, 
in Somalia. They are failed states or failing states, and we 
need to treat those in a separate category. But we will not 
abandon them. In fact, we have increased substantially the 
amount of money we are providing to those countries.
    Then finally, there are countries that are not close to 
making it but we still have programs in those countries. We 
will work in countries that are not disposed toward reform in 
areas that we can work with nongovernmental organizations 
(NGOs) rather than through the government itself.
    So that is how we will reorient our program.
    Thank you very much, Madam Chair.
    [The prepared statement of Hon. Andrew Natsios can be found 
on page 45 in the appendix.]
    Ms. Harris. Thank you, Mr. Natsios.
    The chair recognizes herself to ask the first question. 
This committee has an interest in the adoption of a provision 
of MCA that is currently before the IR Committee that improves 
the coordination and avoids the overlapping and duplication of 
efforts as we begin our bilateral and our multilateral aid 
programs and they start to interact.
    Are you prepared to support these provisions, since we 
believe MCA will affect how we do business with our 
multilateral development banks and international financial 
institutions?
    I would direct my question to Secretary Taylor.
    Mr. Taylor. We are very supportive of making sure that the 
MCA interacts well and is coordinated with the Multilateral 
Development Banks and, of course, with USAID, as Andrew Natsios 
has indicated, and for that matter, with bilateral aid from 
other countries. And we are very, very supportive of any 
efforts that will help us do that.
    I could say already we have actually done a lot to 
communicate. We have made presentations at the World Bank and 
at the other MDBs. Under Secretary Larson and I had a long 
session with the board of the World Bank. We are sort of in 
daily contact with the G-7 about what we are up to in this 
area. So I expect that there will be a lot of coordination and 
communication.
    Ms. Harris. Excellent. Thank you very much.
    The chair recognizes the gentlewoman, the ranking member of 
the subcommittee, from New York.
    Mrs. Maloney. I thank the chair for yielding.
    After 9/11, President Bush worked very, very hard to bring 
the world community together with the United States to combat 
terrorism. And I truly believe--and he was terribly successful, 
wonderfully successful. And I truly believe that one of the 
reasons he was successful was because of the hard work of 
USAID, the State Department and all of our agencies in a 
multilateral way, our friendships with countries, the goodwill 
that we had spread.
    And one of the things that I want to ask you is, how will 
this new account of bilateral aid impact funding of 
multilateral aid? In other words, will our multilateral aid 
contributions decrease with this new source of funding?
    And I, for one, raised this question with Secretary 
Rumsfeld when he addressed Congress, because we are funding 
many, many organizations to go into Iraq. And it seems that it 
would be in our interest to let the United Nations in. I am not 
talking about the weapons inspectors, although I understand 
they are in now, but the humanitarian aid groups that are 
willing to go in and work with us. I would think, particularly 
from Arab countries that are our allies, to help our armed 
services, et cetera, to get them in there so it is Arab to Arab 
working so that you might be more successful.
    Then there is also the aspect of burden-sharing of our 
economic dollars. We are galloping toward a $500 billion 
deficit. To the extent that we can get other countries to work 
with us, share the burden and work with us, it seems like a 
stronger approach.
    So I just wonder, will this program in any way contribute 
to an American policy of decreasing our participation in the 
multilateral organizations that we have been funding, such as 
UNICEF, United Nations, UNFPA and others?
    Mr. Taylor. Well, let me answer that question with respect 
to the international financial institutions.
    Mrs. Maloney. World Bank and IMF, too, yes.
    Mr. Taylor. And then my colleagues will address the others.
    I think right now we have asked for increased funding for 
our assistance to these institutions. For example, the IDA 
funding was an increase in the past.
    And, in fact, what we have tried to do is make these 
contributions very consistent with the Millennium Challenge 
Account. The increase in funding we are asking for IDA for this 
year has a $100 million increment that is there to make sure 
that we get measurable results.
    So it is an increase in funding. And President Bush always 
made clear that the Millennium Challenge Account was meant to 
be an increase over existing funding.
    So it is certainly our intent to continue to support these 
other institutions. But, again, we want to be very specific. We 
are demanding a focus on policy, a focus on measurable results, 
because that is the only way the money is going to work.
    Mr. Frank. Would the gentlewoman yield for 10 seconds?
    Mrs. Maloney. I would always yield to the distinguished 
ranking member.
    Mr. Frank. Just to underline the importance of our markup 
next week, because the Under Secretary referred to IDA, and I 
just would remind people we have what I think is a very 
important markup next week in which I hope this subcommittee 
will endorse that request, send it forward to the 
Appropriations Committee, also for the other, I guess we have 
the African Bank and the Inter-American Bank.
    So I just want to say that I hope we will be able to do 
that, and we have talked to the appropriators, and I am hoping 
we will be able to get that one squared away.
    Mrs. Maloney. Mr. Larson, where is the money going? Is it 
going directly to country governments? Or is it going to NGOs, 
local NGOs or U.S.-based NGOs working in eligible countries?
    And who monitors how the money is being spent? Is the U.S. 
government going to monitor the money, or are countries going 
to send reports? What is the accountability in this aid 
program?
    Mr. Larson. One-sentence answer to your first question, as 
well: The same answer that Secretary Taylor gave on IDA and so 
forth would extend to the United Nations programs. And, in 
fact, we are looking to the United Nations to work with us on 
Iraq reconstruction.
    On the money, the idea is that countries that have 
qualified--and this would only be those that have shown the 
strongest commitment to development--would come forward with 
project proposals which would be negotiated with very clear 
performance benchmarks. The actual Administration of a program 
or an activity would be something that would have to be built 
in.
    In some cases, it may well be that USAID would be an 
implementing agency. It could be implemented by an NGO, but it 
would have to be something that was consistent with the 
country's development strategy. These are countries that are 
supposed to be committed to development, so we want to work 
with the countries and with their governments, even though the 
government may not be the administrating agency in every 
respect.
    We are committed to a very high degree of accountability, 
which is going to require, of course, accountability from the 
country. But that has to be checked. And that would have to be 
checked with outside consultants, with auditors who are not 
only looking at exactly where the money is going, but also 
whether the results that we are looking for are actually being 
achieved.
    Mrs. Maloney. My time is up.
    I just want to close by thanking Mr. Feeney for his really 
beautiful opening statement and the values he expressed in it. 
I agree.
    Thank you.
    Ms. Harris. Thank you.
    Mr. Feeney, do you have any questions?
    Mr. Feeney. Well, I do.
    And I want to thank the gentlelady. I don't know, the more 
I talk, I am sure, the more she will disagree with.
    Mrs. Maloney. I was surprised I agreed so much.
    [Laughter.]
    Mr. Feeney. But, you know, I again am very pleased with the 
concept of reforming foreign aid. And I was also extremely 
pleased to hear Mr. Taylor suggest that productivity is the 
key. Ultimately that leads to higher consumption on a repeated 
basis, as opposed to one-time pump priming. And I am very 
grateful for the direction that you are going.
    But as I look at the specific criteria, I am not sure that 
we have exactly articulated it the way I would. And I think 
that 435 members of Congress would come up with their own 
prescriptions.
    I would like to have Mr. Taylor maybe comment on some 
thoughts.
    As I look at this, I certainly agree that you cannot bail 
out bad policy with enough American taxpayer dollars, no matter 
where we are talking about in the world. And I certainly agree 
that inflation can be bad and deficits can be bad, which were 
two of your major criteria on the Economic Freedom Account.
    But they are very easy to handle. I mean, inflation you can 
stop pretty quickly by deflating your currency. You handle the 
M-1 or the M-2 or the M-3 supply, you quit printing bills. The 
deficit is fairly easy to handle in most places. You just tax 
the people that are producing and working sufficiently, and 
ultimately you can wipe out a deficit pretty quickly in most 
countries, although I know developing countries are a little 
different.
    But it seems to me that the recipe that you have put 
together here, when you combine that with the second major 
principles, which is investing in the public, the way to 
qualify 100 percent for principles three and four that you are 
trying to get here is to basically have 100 percent tax rates 
and 100 percent expenditure rates on education and health care. 
At least as I read the criteria that are set out here, that 
would be one way to comply.
    And I think, going back to Mr. Taylor's ultimate goal, that 
we start with enhancing productivity in a county, what we 
really want to measure is the percentage of gross domestic 
product that is confiscated by the government and used not 
according to individual wishes, which would be the economic 
freedom that ultimately that you have laid out.
    And so I am concerned that maybe some of the specific 
factors that we have talked about actually are undermining the 
ultimate. I would like to hear some descriptions there.
    I mean, arguably, for example, public expenditures on 
health care, I am just guessing at this, but nations that have 
a higher percentage of private health-care spending and 
insurance probably have much better health-care records, life 
expectancies, et cetera, than nations that rely entirely on 
public health-care expenditures. I think you could make the 
same argument with respect to education. Legitimate home 
schooling in countries that have legitimate private and 
competitive systems actually have better public school systems.
    So I guess I am a little worried, in terms of how we are 
actually going to apply all of this concept.
    And then finally, I would ask you to deal with some of 
the--I was a little disturbed that, aside from the Millennium 
Challenge Accounts, we are increasing spending for nations that 
are abject failures under any criteria. And, again, we go back 
to charity is important, and we want to be charitable. But it 
sort of cuts against the grain of what we are trying to do with 
the Millennium Challenge Accounts.
    And already, myself and my colleagues have referred to 
things other than productivity, going back to economic 
productivity as the be-all and end-all of ultimately enhancing 
the quality of life in developing nations. But we have talked 
today about the importance of family planning, reduced 
terrorist threats, democracy. And again, I argued that Hong 
Kong is probably the principal example of economic success, and 
it has had little or no political freedom, in terms of 
elections, over its brief history.
    We talked about the importance of health care and public 
education. And of course, we have talked about, and I mentioned 
it myself, corruption within a government and our geopolitical 
interests. There are times when we simply want to buy favors 
from nations who are strategically placed.
    So how this all fits together in a foreign-policy scheme is 
interesting to me. But the Millennium Challenge Accounts, 
itself, which we are talking about today, I think it is 
important that we develop criteria that are legitimately 
designed to create productivity on the front end.
    And I want to, I guess, maybe just have--I have just been 
rambling, but if you can just respond to some of those 
thoughts.
    Mr. Taylor. Yes, thank you very much for those 
observations.
    I would say at the start--and, you know, we discussed all 
sorts of possible indicators and had lots of suggestions. And 
the points you are making are ones that have been on our mind.
    There is a sense in which the indicators are objective, 
observable, they can provide input to the decision-makers who 
are going to make the judgments. So if there is a case which is 
even close to as bizarre as the one you indicated, where taxes 
are extraordinarily high and anybody could see would be 
defeating the economic growth, that would not be what you would 
be looking for, in terms of good policy performance.
    There is an alternative, to just look at the fraction of 
government spending as a share of GDP. That is another measure. 
We considered that. Many different possibilities were 
considered. This one seemed to be--the budget deficit itself 
seemed to be one that brought things together as much as 
possible.
    With respect to public expenditures, you are right, that is 
an input measure. That is why we thought this output measure 
was important to add to it. The focus should be on, really, the 
investing-in-people aspect, whether it is public sector or 
private sector.
    So these are things which we think are good indicators. I 
do not want to indicate that they are not at all. But there is 
no indicator without some problems. But I think, as a whole, 
they work well, they are robust, they cover different areas.
    With respect to the other reasons for foreign aid, which 
there are and will be, we have other sources of funding. This 
is an increase in funding over existing sources. And so this 
MCA is meant to focus on these areas. Humanitarian support, as 
Mr. Natsios has indicated, is a very important part of our 
foreign policy. So is our strategic issues. And maybe my 
colleagues want to address that.
    But I think what we have got here with the MCA should focus 
on the growth and productivity, as you indicate. And I think it 
does that, considering all the different issues that we have 
looked at.
    Mr. Larson. Could I----
    Ms. Harris. Mr.----
    Mr. Larson. I am sorry. I just want to make two quick 
observations on the congressman's questions.
    One is that I think that some of the indicators in this 
last basket of economic freedom and supporting entrepreneurship 
are interesting and important ones: days to start a business, 
the free trade orientation, regulatory quality and the country 
credit rating, which is sort of a composite view of the doing-
business characteristics of this country.
    And then I think this is an attempt to give more weight 
than any other assistance program I know of to the factors that 
are friendly to entrepreneurial initiative.
    The second point would be, we tried to do this in a way 
that no country would get in simply by being good in one of the 
three baskets. We have come up with a structure that emphasizes 
the importance of being a strong performer on economic freedom, 
a strong performer on empowering one's own people through 
education and health, and also a strong performer in the area 
of political freedom and governing justly.
    And so the idea is to not have a country get in because 
they are a strong performer in only one or two of those areas.
    Ms. Harris. Yes, Mr. Natsios?
    Mr. Natsios. If I could just add a couple of comments. When 
we talk about whether foreign aid has been a success or not, we 
have to talk about which category of foreign aid. Are we 
talking about disaster relief? We have actually had remarkable 
success in preventing famines when they were sweeping across 
countries, and our assistance has, in fact, resulted in the 
prevention of mass starvation in many countries.
    India has not, for example, had a famine since 
independence. And one reason was, in the 1960s, when they were 
faced with massive agricultural failure, there was massive 
amounts of food aid that went into the country from the United 
States. They are now a net importer of U.S. food commercially, 
because they liked our food so much that they now buy it.
    And the type of assistance we have increased for failed and 
failing states is disaster assistance. It is to keep people 
alive. It is not to reform the economy. We are not under any 
illusions in those countries. But we are keeping people alive. 
We are reducing the child mortality rates, that sort of thing.
    Secondly, in the category of social services, where we have 
put a lot of focus the last 30 years since the early 1970s, we 
have been actually very successful. The child mortality rates 
and health indicators right now in the developing world are the 
same as they were in the United States in 1950 and in Canada. 
So their rates now are what our rates were 50 years ago.
    And the literacy rates in the developing world right now 
are what they were in the United States in 1950.
    If you look at where the developing countries were in 1950, 
they have made enormous progress in the social services. The 
problem is, social services are important; but they are not 
sufficient to ensure economic growth.
    All of the international institutions--the World Bank, the 
regional banks, the United Nations and all the donor aid 
agencies got out of doing two things, which, in my view, were a 
disaster: One area is they stopped doing agriculture. Beginning 
in the 1980s, mid 1980s, after Peter McPherson left as 
administrator of USAID, we stopped investing in agriculture. 
Two-thirds of the poor people in the world live in rural areas. 
They are farmers. If you do not invest in agriculture, there is 
going to be a lot of poverty in rural areas, and hunger. And 
there still is. We are now reinvesting in those areas.
    Most developing-country heads of state will tell you, if 
they had a choice, they would not put money into places where 
we put money. They want more money in the rural areas where all 
their poor people are, because those poor people are going to 
the cities now, and the cities do not have the infrastructure 
to accept them.
    The second area we stopped putting investments in is 
infrastructure, particularly roads. You know, if you are a 
farmer and grow more surplus and you cannot move it, the food 
rots. So farmers do not grow surpluses because they cannot move 
what they grow out of the area and the village they are in.
    That was another major mistake, because you cannot have 
industrial growth, commercial growth and agricultural growth 
without some kind of infrastructure, particularly in the rural 
areas.
    Most of the people we talked to privately in countries that 
may qualify will tell you, ``The first thing we are going to do 
is build more roads into the rural areas, because that is what 
we need to do our development.''
    Ms. Harris. Thank you, Mr. Natsios.
    The ranking member of the full committee is recognized for 
questions, the gentleman from Massachusetts.
    Mr. Frank. Thank you.
    I want to begin by expressing my appreciation for the 
remarks we have just heard from the Administrator of USAID. I 
think it was an important distinction that he made. Keeping 
children from starving is about as good a use of my time as I 
can think of. And the people I represent, if I take a small 
part of the taxes they pay to do that, I think they are happy. 
And I think our record as humanitarians, it is very important, 
and we ought to recognize the importance of doing that.
    Secondly, I was very pleased to hear my former 
Massachusetts legislative colleague--back in the old days, we 
used to agree more there than people thought we might--talk 
about agriculture, because, you know, I am one who has voted in 
the past against some of the trade agreements. And when people 
have been critical because they say I am not supporting free 
trade, my answer is I voted against the agriculture bill. And I 
think, in voting against the agriculture bill, I took a 
stronger stand in favor of the right kind of trade than 
everything else put together.
    And I think you have just underlined the extent to which 
our agricultural policy goes so counter to what we are trying 
to do, because when we subsidize our food growth, we undercut 
particularly what the Administrator was talking about.
    I do have just a couple of questions. First, I did want to 
say with regard to the question the ranking member of the 
subcommittee asked about cooperation with the international 
financial institutions, I was struck to note, of the 15 
criteria here, in 12 of the 15 instances, it is the World Bank 
or the IMF to whom you refer for the grading. So that does 
show, it seems to me, a good integration of those.
    I also want to note, I am very pleased to have this 
threesome here. And maybe I am speaking against committee 
interest here, but one of the things that has bothered me with 
regard to the World Bank, the IMF, et cetera, is--and then we 
have foreign aid--we have got two different international 
economic policies. We have the State Department's international 
economic policy, with USAID basically aligned there, which 
deals with our bilateral assistance, and then we have our 
participation in the multilateral entities, which is under the 
jurisdiction of Treasury. And I think we need a mix in both 
cases. I have felt that it was a shortcoming to have that kind 
of bifurcation.
    So one of the advantages of this is, this is the first time 
that I can recall where we are talking about international 
economic activity and we have both State and Treasury here. And 
I hope we will build on that.
    Now, just a couple of questions, and I raised this one 
before. Corruption is pass-fail--you absolutely have to pass on 
corruption--but civil liberties and political freedom is not. 
And that troubles me. You know, maybe because I grew up in New 
Jersey City in the 1950s and 1960s, and, you know, we did not 
get rid of corruption but we had political freedom. I am not 
sure, if we had been asked to do the tradeoff, where we would 
have gone. Although under Frank Hague, actually, they had 
neither, you may remember.
    But why is that the case? And is there--I mean, some 
corruption versus no freedom, that troubles me. Mr. Larson?
    Mr. Larson. Well, thank you, Congressman, and I was 
beginning to get at your question in response to the last one.
    In other words, a country is not going to rise to the top 
for consideration by the board unless it is above average in at 
least three of these governance criteria. And so we did that 
very deliberately, because we did not think it would be 
appropriate or good use of taxpayers' money to be supporting 
countries, even if they were the star performers in investing 
in their people and the star performers in terms of economic 
freedom, if they were not, you know, at least above average in 
these broad governance criteria. So they have to be above the 
median in at least three of them.
    The corruption one, I think, is a very important one 
because it is so endemic. Corruption does undercut democratic 
institutions, as I know we all appreciate. It really saps the 
development success in the countries where it is endemic.
    And it was the Administration's view that in a country that 
really was a poor performer on corruption that it would be 
impossible to have support for investment of taxpayer dollars 
and that we could not get the results that we wanted.
    Mr. Frank. I appreciate that.
    Actually, it also gets at one thing that troubles me, and 
to some extent, as I read this, I get the sense that I am in 
Lake Wobegon where all the children are above average, Garrison 
Keillor's term. I mean, that does--what troubles me is that you 
could have people doing very well, but because they are not 
above the median that they could be in trouble.
    And I would wonder why we could not have a more--but let 
me--one last question, then I will be glad to get the answer. 
And that is, when we talk about--one of the criteria is you 
cannot have a deficit, a three-year budget deficit. And I think 
we said 3 percent was the number, is that correct? I mean, how 
do we explain to them why this applies to them and not to us?
    [Laughter.]
    Yes, go ahead.
    Mr. Taylor. Yes. On the deficit, this is an average over 
time. And it is meant to be what happens not just when you are 
in a slow-down period, but when you are averaged across the 
cycle. So----
    Mr. Frank. Like, say, five years?
    Mr. Taylor. Yes, it is meant to be an indication of overall 
fiscal stance, soundness over a long period of time.
    Mr. Frank. So, it does not just mean deficit. When it says 
deficit, that is----
    Mr. Taylor. Clearly, when you are going in a slump----
    Mr. Frank. I mean, in other words--Okay. Because it does 
seem to me we are going to be ineligible. Lucky we do not need 
this.
    But let me go back to the--if I could just get an answer on 
absolute versus grading on the curve. I mean, that is the 
troubling aspect.
    Mr. Larson. Well, we want to focus on the countries that 
have an overall policy framework that is going to get the best 
development return. I think Andrew Natsios pointed out that is 
the one big lesson that we have got, is----
    Mr. Frank. But question, what if we have a good--what if 
this succeeds and they all start getting good? Why do we then--
are we going to run out of money? I mean, only half of them, 
are we sure that----
    Mr. Larson. If we are able to show extraordinarily improved 
developmental outcomes as a result of this approach, I think 
there would be a lot of us that would believe we should go to 
the Congress and say, ``We are getting such extraordinary 
returns, we ought to be prepared to make larger investments.'' 
But we need to test this, and that is why we are beginning 
with----
    Mr. Frank. If Administrator Natsios could respond to this, 
because he seemed eager to.
    Mr. Natsios. Yes, if I could. We would love to have this 
succeed so much that every country is going to be pushed into 
this account. I have to tell you, in my own experience, that is 
not going to happen.
    The impediments to reform in most of these countries are as 
substantial as they are in the United States. The only 
difference is, we are already rich, so reform does not mean the 
difference between complete deprivation for the whole society 
and prosperity. In these countries, it does.
    And this is the fact, this is the one statistic that is 
most disturbing, and I think goes back to Congressman Feeney's 
point about the failure of foreign aid. In terms of the 
elimination of poverty as opposed to social services, in 
humanitarian assistance, which is a different category, we have 
a poor record. All the donors do--all of the banks, the U.N. 
And why is that?
    Since 1980, only one country has graduated from LDC status, 
the least developed country status. There are forty-eight of 
them. My first conference I went to after I took over as the 
USAID administrator was the head of the delegation to a 
conference on the least developed countries, which they have 
every 10 years.
    The one country is Botswana. And they did not do it from 
foreign aid, although we had a big foreign aid program there. 
They did it from preventing the elite from stealing the 
revenues from the diamond mines, and using those revenues to 
build the country. In other words, it is a democratic country, 
they respect human rights, it is a parliamentary democracy, it 
is well-governed, and they have relatively low levels of 
corruption. They took the diamond revenues, and they used the 
funds to develop the country. That is why they graduated.
    No one else has graduated from the poorest countries in the 
world. If we have 15 countries, which is our goal to get into 
this program--and this is geared toward our criteria, the 
poorest countries in the world--if we have 15, which would be 
one-third of the LDCs, graduate, it will be miraculous. We will 
have made more progress than is conceivable under the 
legislation.
    So, we only wish more countries would qualify, but I am not 
sure that is going to happen.
    Ms. Harris. Thank you.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Madam Chair.
    As one member who has had the benefit of traveling 
extensively in Latin America, I certainly applaud the goal of 
poverty reduction, because if you truly want to see some real 
poverty, there are places in Latin America where you can see 
it.
    Obviously, though, and I do associate myself with my 
colleague, Mr. Feeney's, comments that historically there seems 
to be a very poor correlation between poverty reduction and 
U.S. aid. So, first, I would certainly like to applaud the 
Administration for this initiative, for actually trying to tie 
aid to demonstrable policy changes. I do believe the world 
works off of incentives, so, to incent these people to engage 
in better policies that will lead to poverty reduction is a 
noble goal.
    I have several questions that I would like to ask. One is, 
I believe on your indicators of encouraging economic freedom, 
one is trade policy. It takes two to trade, so I am curious, 
what proposals or initiatives does the Administration have to 
increase trade with potential MCA nations?
    And I am not sure who is best qualified to answer that 
question. Perhaps we will start with you, Mr. Taylor.
    Mr. Taylor. The measure of trade that we have included is 
the country's openness to trade, the country's reduction in 
trade barriers.
    Mr. Hensarling. No, I understand that, but my----
    Mr. Taylor. And that is, of course, important.
    One of the possible ways that the funds could be used is to 
improve capacity to trade--port facilities, airports, things 
like that. That is very much, in the sense of capacity 
building, could be a source or a use of some of these funds. 
And we will very much be supportive of that, if that is what 
countries want to do.
    In the meantime, of course, we have other trade 
initiatives. For Africa, we have the African Growth and 
Opportunity Act. We are moving with free trade agreements, et 
cetera.
    Mr. Larson. Congressman, if I could just add one quick 
point.
    We are in the midst of the Doha development agenda, the WTO 
round that has a specific focus on development. And it is 
particularly important for all of the countries that could be 
beneficiaries in this program for that to succeed. Because 
multilateral trade liberalization is the most important trade 
tool we have. Seventy percent of the duties that developing 
countries pay on their exports, they pay to other developing 
countries.
    So, we believe these preference programs such as the Africa 
Growth and Opportunity Act are important, but we also believe 
that it is very important, in order to stimulate development, 
to achieve a global trade-liberalizing agenda on manufactured 
goods and on agricultural products, as well as services.
    Mr. Hensarling. Several Congresses ago, we passed welfare 
reform. It has been a hugely successful program in moving 
people off of welfare checks and onto paychecks, moving people 
off of lives of dependency into lives of independence and self-
respect. And I think there is an analogy here. Part of what we 
did was tie welfare receipts to behavioral changes, but another 
thing we did is put a time limit on welfare.
    I am curious, given that once again my observation is that 
the world tends to work off of incentives, why would an MCA 
nation not, perhaps, the regime, be incented to make very, very 
small progress and string along their aid for a very long time, 
as opposed to eventually weaning themselves off of that aid? Is 
there any contemplation of a time limit for MCA assistance?
    Mr. Larson. We definitely want to keep the incentives 
right. And we have been very clear that specific activities 
under the Millennium Challenge Account would be time-limited. 
In other words, we would want to build into any project or any 
activity a beginning period and an end date at which point the 
country could undertake any further responsibility that is 
necessary to make that project or activity succeed.
    Mr. Hensarling. I will ask my last question, since I see my 
time is running out. Obviously, the two greatest challenges 
that I would observe in these countries in working their way 
out of poverty has to do with their policies and corruption, 
although I am not exactly sure how one gets their arms around 
corruption.
    For example, in our country, and I think we have had the 
Secretary of HUD testify before this committee, two years ago, 
HUD lost 10 percent or $3 billion, of their budget in 
overpayments. Is that a facet of corruption? In addition, we 
have the GAO who cannot certify 22 out of 26 major department 
accounts.
    So, if we cannot figure out where all the money is going in 
our government, how are we ever going to figure out where all 
the money is going in these governments?
    Mr. Taylor. Just very briefly, Congressman, there is a 
significant matter of degree here. If you take, for example, in 
many developing countries which you know where just to move 
goods down the road, across the border or around borders, there 
are checkpoints, there are people checking there, taking their 
charges, and that is a significant barrier to commerce and to 
trade. But it goes on and on like that.
    It is an order-of-magnitude difference. And nobody is 
perfect, by any means, but, you know, seriously, this is a very 
great impediment to development in these countries.
    Ms. Harris. Thank you.
    Oh, I am sorry.
    Mr. Natsios. We have evidence that the countries that have 
the highest levels of corruption are not only not making 
progress, they are regressing.
    There is one country in Africa that is very rich, 
potentially, and 25 percent of the national income of the 
country is missing from the national treasury, and that is not 
from bad accounting. That is a World Bank estimate. The country 
itself could not possibly tell you how much is missing because 
they do not have accounting systems to do it. The bank had to 
go in and do their own audit of it.
    The difference between what you are talking about and what 
we are seeing there is not because human nature is any 
different here; it is not. I keep telling heads of state all 
over the world, Americans are no different than your people 
are. The difference is we have a whole set of powerful 
institutions that mitigate against fallen human nature in the 
American system. And that is what prevents the abuse from 
getting out of control.
    In many of these countries, there are no institutions that 
control corruption. The inspector general exists, they call it 
the general audit authority, but has no power at all to do 
anything. They do not even have any auditors, in many 
countries. And there is actually no way to prosecute the 
offenders. The courts do not function. No one ever gets 
indicted for corruption, in many of these countries.
    If you do not have even the minimal set of institutions, 
you will not control corruption, it gets completely out of 
control, it is part of the system, it is expected, everybody 
takes bribes.
    None of those things are true in our system. We have our 
scandals, as do the Western Europeans and the Canadians. That 
happens, but we have systems for controlling it. And that is 
what many of these countries need to establish, strong 
institutions to deal with fallen human nature.
    Ms. Harris. Thank you.
    The gentlewoman from California is recognized.
    Ms. Lee. Thank you, Madam Chair.
    Let me first say that this, the MCA proposal, I believe we 
are marking up in International Relations this week, and I 
serve on it, the International Relations Committee. And since 
it has been introduced, of course, I have had many, many 
concerns about it.
    And I say this, starting with the fact that once we learned 
that the Heritage Foundation and, I believe, the Freedom Fund 
had developed, for the most part, the criteria, this raised 
concerns with many members of the Congressional Black Caucus, 
because these two organizations do not reflect the diversity of 
thought in America, in terms of criteria that could or should 
be developed with such a magnitude of a program as this with 
taxpayer dollars.
    So having said that, I just want to say to you that we have 
been looking at this very carefully, and so I welcome your 
testimony today.
    And one of the areas that we have been concerned with, 
myself and many members of the Congressional Black Caucus, is 
the role of the United States private sector. What exactly is 
that role?
    I noticed in your testimony, Mr. Larson, you talk about 
possibly evaluations, technical assistance, auditing, 
monitoring. What exactly does the U.S. business community see, 
or how do you see this as it relates to the U.S. business 
community and where the connection is?
    Mr. Larson. Thank you.
    With respect to your first comment about the indicators, 
what we have tried to do is go into the public domain for the 
best available public indicators so we could have the degree of 
transparency that we think the Congress and the American people 
would like. Most of these indicators were ones that are done by 
the World Bank Institute.
    There are some that where the best indicator of what we 
were looking at, like trade policy, we felt, came from an 
institution like Heritage House. We did not take it because of 
their political orientation. We took it because they had a 
good, publicly available indicator of trade policy.
    On the U.S. private sector, my sense is that there is 
strong interest and support from this from many of our 
businesses. Not because they see immediate opportunity, because 
many of these countries are very, very poor and where, at least 
in the short run, there are not going to be significant 
opportunities. But I think they do see an approach that they 
like, an approach that sort of marries compassion and a 
commitment to results and to accountability.
    I think that we may find that when we are trying to measure 
and assess results, that we may, you know, we want to have the 
freedom to go to all sorts of contractors, whether it is NGOs, 
businesses, accounting firms, international organizations, to 
sort of help us assess what our successes or failures are.
    Ms. Lee. In doing that, let me ask you, because I know the 
point is to fast-track a lot of this in terms of the board and 
the CEO having that kind of authority, how are you going to 
ensure that when you do go out in terms of going into the 
private sector, that there are non-discrimination aspects of 
the contracting procedures, that there is outreach as it 
relates to minority and women-owned businesses?
    I mean, how is that piece going to be secured in an 
operation such as this that is new and quasi-governmental, 
quasi-private. It looks like you do not have to comply with 
United States guidelines, as it relates to minority and women-
owned business contracting.
    Mr. Larson. We want to have this organization be a model of 
transparency and flexibility. I think that, among other things, 
will mean using the Internet to disseminate very, very widely 
opportunities for contractors to provide services.
    We believe that by focusing largely on subsidy here in 
Africa and the poorer countries of Latin America, we are going 
to find that there are many Americans who have links to those 
countries that will have very, very strong comparative 
advantage in bidding for these contracts or services that are 
required by the corporation. There is going to be a strong 
interest in reaching out to those people, because they will be 
in the best position to provide the services required.
    Ms. Lee. But aside from Internet access, I mean, how do you 
plan to do that? I mean, Mr. Natsios could tell you in terms of 
the lack of participation of minority firms in USAID 
contracting, and they have to comply.
    So what is it that you are going to do to make sure that 
the outreach, the technical assistance, the inclusion is there, 
rather than just posting it on the Internet and say, ``Go for 
what you know.''
    This is a good--I will not say a good old boys' network of 
firms out there, but this is a culture that is difficult to 
penetrate for women and for minority-owned businesses.
    And with an initiative with this much money involved, where 
there is a chance that contracting with U.S. companies will 
take place, what is it that you are going to do to make sure 
that access is provided, other than providing it on the 
Internet?
    Mr. Larson. Well, again, one of the reasons for setting up 
a corporation that is different is to get fresh thinking about 
how to accomplish all of these things.
    I stress the transparency in the Internet aspects, because 
I think it is one of the most obvious tools.
    We are at work now trying to develop options for the types 
of management issues that you are raising. How can this 
corporation do innovative, flexible, effective contracting and 
reach out? How can it have a personnel policy that is flexible 
and results-oriented?
    I mean, this is some of the administrative and managerial 
spadework that the Administration is doing right now, as the 
Congress is considering authorization----
    Ms. Lee. But will you be required to comply with existing 
law and regulations with regard to this, or not?
    Mr. Larson. The Administration has proposed to have 
flexibility on contracting so we could go out and get the 
services at the best possible price and with the best 
possible----
    Ms. Lee. So the answer is no. You can----
    Mr. Larson. Well, I am trying to tell you what it is that 
we are looking for.
    Ms. Lee. Yes, that is what I am asking you.
    Mr. Larson. And----
    Ms. Lee. You do not have to comply with current, existing 
laws, as it relates to the utilization of minority and women-
owned businesses.
    Mr. Larson. We would propose to do that through the sort of 
outreach efforts that I was just describing.
    Ms. Lee. So, you do not have to comply. Okay. I am trying 
to get a handle on that, and it has been very fuzzy up until 
now. But thank you for stating it very clearly.
    Ms. Harris. The gentleman from Minnesota is recognized.
    Mr. Kennedy. In reference to the ranking member's comments 
about Lake Wobegon, I am pleased to be the official 
representative of Lake Wobegon.
    [Laughter.]
    And yes, all of our children are above average, though a 
prior Kennedy chose to address international development and 
exporting those above-average children from Lake Wobegon as 
part of the Peace Corps. And I think this a great step forward 
to export the principles of what we stand for in Lake Wobegon 
and across the country, to try to get others to embrace those, 
because those principles have, indeed, been so successful for 
us.
    And I think I would also agree with the ranking member that 
there are few more important things we can do than try to 
address the needs, in this case, of people in your initial 
sample that have a per-capita income of $1,425. I mean, these 
are people that are really in need.
    And I think this does leverage--if it is successful, this 
can hopefully influence the way that the international bodies 
are addressing economic development and our other examples to 
try to leverage the successful track record that embracing the 
free markets, embracing open economies can really result in.
    I have a couple of criteria questions, though. The first 
one is, if you read the founding of our country in the 
Federalist Papers, and James Madison, he highlighted the 
importance of property rights to begin any real economic 
development. And although, you know, we have a couple of 
bankshots here toward property rights, I do not really see it 
listed as one of the criteria that needs to be preserved.
    Mr. Taylor. The property rights are certainly essential. 
Rule of law, property rights go together. The indicators that 
we have under the civil liberties and political rights do 
emphasize the rule of law. And, of course, the control of 
corruption relates to property rights, as well.
    So, it is definitely part of these measures in a number of 
different ways as you look through them.
    Mr. Kennedy. Okay. And I would just encourage that, you 
know, we maybe look at that as being a bit more central and a 
bit more stated as part of those criteria. You can have a rule 
of law that still has a law that ignores property rights. And I 
think we need to make sure that we keep that central, given how 
important that is.
    Another key concern to us, particularly on the Financial 
Services Committee, is to make sure that there is a solid 
banking in a system that is out there, that is honest, that is 
sound, that is providing what it needs to the private industry, 
the entrepreneurs, to go. And do we feel confident that, again, 
the criteria we have established ensures that that is being 
encouraged to be developed?
    Mr. Taylor. I would say that is an area which we always 
focus on in our relationships with other countries, and the IMF 
in particular looks at that with their financial-sector 
assessment programs.
    There are some regulatory measures that are developed by 
the World Bank Institute. It is in the encouraging economic 
freedoms, called Regulatory Quality Rating, and it is an 
indicator that includes many--it is an aggregate of other 
indicators.
    I believe if you combine that with the credit rating 
index--the credit rating index is measuring financial stability 
to some extent. It is also fiscal stability. But the people who 
look at the credit rating will, of course, be looking at the 
soundness of the banking system. It is a very important part of 
a credit rating for a country.
    And one of the economic freedom measures we have is the 
country credit rating developed by Institutional Investor 
Magazine. So, those are a couple of ways where that factor 
comes into play.
    But that is going to require, I think, continued emphasis, 
because even countries that are not so poor still have 
improvements to be made in their financial sector.
    Mr. Kennedy. And, Secretary Taylor, in your submitted 
testimony, you listed the criteria underneath each of the 
categories. And as I went through ``investing in people'' and 
``encouraging economic freedom'' criteria, there was always an 
objective published data that could be used to develop that. As 
I go through the ``governing justly,'' no sort of existing 
indexes that are published and available were cited.
    Is that something we are creating, those indexes, or are we 
looking at outside entities to provide those?
    Mr. Taylor. The ``governing justly'' indicators are 
actually all available publicly. Freedom House does the two 
indices called Civil Liberties and Political Rights, and those 
are published annually. They have a nice little paperback book 
you can get out and look at the descriptions for each country, 
plus it is on the website.
    Now, the World Bank Institute developed the other four 
indicators, and those are also publicly available. Those four 
indicators are, in turn, based on lots of other measures that 
are put together by other agencies and other research firms, 
other surveys. But those are all publicly available. In fact, 
they are all on the websites right now.
    Mr. Kennedy. That is great.
    And I just want to follow up on Congressman Feeney's 
concern about the health expenditures. When we say ``public 
expenditure on health,'' does that mean just government 
spending on health? Or does that mean with the private sector 
spending on health in addition?
    Because, you know, when we talk about people are acting the 
way they are incented to act, I do not want to encourage people 
to have a single payer in a government health plan that 
certainly a number of us would not support, and have that be 
exported because of this criteria to other countries.
    Mr. Taylor. The measure now is public sector as stated. 
What we were looking for is good measures of a country's intent 
to invest in people. When we get more and more data, perhaps 
some of these could be refined and revised.
    And I would also say that it is not just the expenditures, 
it is the results, those immunization rates, for example, that 
we focused on, and the completion rates for schools. So, it is 
not just the inputs, it is the outputs.
    And, finally, I would emphasize that the judgment about the 
country's qualification is going to depend on these indicators, 
but also taking other things into account. So, for example, if 
there is some missing data, some judgment will have to be 
applied.
    Also, if you are in a situation where there is a clear 
intent, maybe measured by private-sector development of health, 
that is very significant in a country, and for that reason the 
public expenditures may be lower, that would be exactly the 
kind of thing that the Millennium Challenge Board would take 
into account.
    Mr. Kennedy. Now, you talked about judgments, you talked 
about potentially revising these criteria over time. What role 
would you see Congress having, in terms of oversight in 
providing input as we go through this with the Millennium 
Challenge?
    And will there be an inspector general that MCA will have, 
to help make sure that these criteria are being applied and 
that we are being rigorous in our approach?
    Whoever wants to answer that.
    Mr. Larson. There will be an inspector general. The 
Administration is still considering whether it should be 
USAID's inspector general or a different inspector general, but 
there will be an inspector general.
    And I do think that--I know that Secretary Powell and I am 
sure that Secretary Snow would feel the same way. We expect to 
have very strong accountability to the Congress and oversight 
to the Congress for the results that we are achieving, and that 
the CEO will be someone who will want to work with the 
Congress.
    I think it is very important what Under Secretary Taylor 
was stressing. At the end of the day, the Cabinet-level board 
is going to take all of this information into account, and then 
make its best judgment on recommendations to the President 
about which countries really meet the underlying criteria of 
governing justly, promoting economic freedom and investing in 
their own people.
    And that board, that Cabinet-level board, will be 
accountable to the President, accountable to the Congress and 
accountable for the results that they are achieving. And that 
will entail any revision of these indicators, which are tools 
but not a replacement for the judgment of the board.
    Ms. Harris. Thank you.
    The gentlewoman from California is recognized.
    Ms. Waters. Thank you very much. And I am sorry that I was 
not able to spend more time here. We have so many conflicts in 
scheduling. But I did want to come to show my interest.
    The one, I guess, major concern that I have, as I look at 
the makeup of the board, is the absence of USAID. What role 
will USAID play with this board?
    Mr. Natsios. I report to the Secretary of State. I go to 
Colin Powell's morning meeting at 8:30 every morning. He is our 
representative on that board. So we have a representative, and 
he is the Secretary of State, or she, depending on the 
Administration.
    We expect, in the field, that if an MCA country is chosen 
and there is a USAID mission in the country, that USAID will be 
called on by the MCC corporation to help administer the 
program. But that is a decision that will be made based on the 
country in particular and the decisions of the board.
    Ms. Waters. Am I correct in understanding that USAID has 
been the lead, historically, with these kinds of decisions?
    Mr. Larson. In foreign assistance, the responsibility is 
divided. The Treasury Department handles the international 
financial institutions. In other words, our assistance that 
goes through those institutions is handled by Treasury.
    Except for the World Food Programme, most of the U.N. 
agencies that get money from the U.S. government get it through 
the State Department. The State Department also has an account 
called the ESF account.
    I would say that maybe 60 percent, 55 percent of the 
foreign assistance program of the U.S. government has been, 
historically, in the last 20 years, handled by USAID, and the 
other 45 percent by either State or Treasury and now some by 
HHS. So, it is divided.
    Ms. Waters. Am I to--I have always understood that USAID, 
being involved on the ground, interacting with nongovernmental 
organizations, have an intimate knowledge of how things really 
work in many of these countries, and that is the kind of 
information that has helped us make some decisions about 
financial assistance and funding.
    How do you anticipate having that on-the-ground, 
interactive knowledge communicated to and acted on by this 
board?
    And do not tell me the Secretary of State, because I 
recognize that is your boss.
    Mr. Natsios. Sure.
    Ms. Waters. But I also understand that he gets his 
information from the bottom up, and that he really cannot make 
decisions unless he knows what is going on on the ground and 
that the combination of work that is done by our embassies and 
all of that personnel and USAID--my husband was an ambassador, 
so I understand that very well.
    Now, so, how will they get this information?
    Ms. Harris. Could I ask the gentlewoman if she would yield 
a moment?
    In the latest information that we have, the USAID will be 
represented on the board.
    Ms. Waters. I am sorry, what did you say?
    Ms. Harris. In the information, USAID will be on the MCA 
board.
    Ms. Waters. Why doesn't he know that?
    Ms. Harris. I am not sure if he is----
    Mr. Natsios. There are some things I know I do not say, 
Congresswoman, because they are decisions of the Congress that 
have been made, but Congresswoman Harris has said this, and 
that is a decision of the Congress.
    The way our legislation was submitted, the USAID 
administrator is not on the board. But there are----
    Ms. Waters. Oh, but you are saying that you are going to be 
active in helping to make sure he is on the board.
    Ms. Harris. In the information that we received that will 
be presented in the markup, USAID is on the board.
    Ms. Waters. I see. All right. Thank you very much. Just 
wondering.
    Ms. Harris. Great question.
    Well, I want to thank the members of the panel, Secretary 
Taylor, Secretary Larson and Administrator Natsios, for 
participating today.
    I understand that the chair notes that some members may 
have additional questions that they wish to submit to the panel 
in writing. So, without objection, the hearing record will 
remain open for 30 days for members to submit written questions 
to these witnesses and place their responses in the record.
    This hearing is adjourned.
    [Whereupon, at 11:52 a.m., the subcommittee was adjourned.]

                            A P P E N D I X



                             June 11, 2003

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