[Senate Hearing 108-25]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 108-25

 
                    THE MILLENNIUM CHALLENGE ACCOUNT:
                            A NEW WAY TO AID

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

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MARCH 4, 2003

                               __________

       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming             RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio            BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee           BILL NELSON, Florida
NORM COLEMAN, Minnesota              JOHN D. ROCKEFELLER IV, West 
JOHN E. SUNUNU, New Hampshire            Virginia
                                     JON S. CORZINE, New Jersey

                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)




                                CONTENTS

                              ----------                              
                                                                   Page

Berresford, Ms. Susan V., president, Ford Foundation, Washington, 
  DC.............................................................    74
    Prepared statement...........................................    77
Larson, Hon. Alan, Under Secretary of State for Economics, 
  Business and Agricultural Affairs, Department of State, 
  Washington, DC.................................................     3
    Prepared statement...........................................     4
    Responses to additional questions for the record from Senator 
      Biden......................................................    93
    Responses to additional questions for the record from Senator 
      Jeffords...................................................    99
McClymont, Ms. Mary E., president and CEO, InterAction, 
  Washington, DC.................................................    54
    Prepared statement...........................................    57
Natsios, Hon. Andrew S., Administrator, Agency for International 
  Development [USAID], Washington, DC............................    13
    Prepared statement...........................................    16
    Responses to additional questions for the record from Senator 
      Biden......................................................    97
Radelet, Dr. Steve, senior fellow, Center for Global Development, 
  Washington, DC.................................................    43
    Prepared statement...........................................    46
Taylor, Hon. John B., Under Secretary for International Affairs, 
  Department of the Treasury, Washington, DC.....................     7
    Prepared statement...........................................    10

             Additional Statements Submitted for the Record

American Foreign Service Association, John K. Naland, president 
  and Joseph Pastic, vice president for USAID....................    89
National Audubon Society, Bob Perciasepe, senior vice president..    91

                                 (iii)

  


                   THE MILLENNIUM CHALLENGE ACCOUNT:
                            A NEW WAY TO AID

                              ----------                              


                         TUESDAY, MARCH 4, 2003

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar (chairman of the committee), presiding.
    Present: Senators Lugar, Hagel, Chafee, Brownback, 
Alexander, Coleman, Sununu, Biden, Feingold and Bill Nelson.
    The Chairman. This meeting of the Senate Foreign Relations 
Committee will come to order. Today the Foreign Relations 
Committee will examine President Bush's proposal for a new 
mechanism to deliver foreign assistance. It is called the 
Millennium Challenge Account, or MCA.
    President Bush's calls to establish the MCA come at a time 
when a reassessment of foreign assistance is badly overdue. 
American foreign assistance programs lack unifying objectives 
or coherent criteria. Too much of our foreign assistance is 
determined by obsolete cold war imperatives, the vestiges of 
our responses to past humanitarian emergencies, or domestic 
political inertia.
    In my judgment, the primary goal of American foreign 
assistance must be to combat terrorism. And in some instances, 
this requires direct military and economic aid to key allies of 
the war on terrorism. But our foreign assistance must also be 
aimed at broader objectives that aid in the fight against 
terrorism over the long run.
    These include strengthening democracy, building free 
markets, and encouraging the civil society in nations that 
otherwise might become havens or breeding grounds for 
terrorists. We must seek to encourage societies that can 
nurture and fulfill the aspirations of their citizens and deny 
terrorists the uncontrolled territory and abject poverty in 
which they thrive.
    To do this, all of us should begin to think about foreign 
assistance as a critical asset in the war on terrorism. In this 
context, an ineffective foreign aid program squanders our anti-
terrorist assets just as surely as does a poorly designed war 
plane or an unnecessary military base or a flawed intelligence 
collection operation. It is up to this committee--and 
ultimately every Member of Congress--to cooperate in the 
construction of the most potent foreign aid strategy possible.
    Now, this process will require us to ask how nations 
develop political stability and economic momentum, and how they 
become good international citizens that contribute to the peace 
and prosperity of the world community.
    The Millennium Challenge Account is being established on 
the bold assumption that we do know some of the answers. We 
believe that successful societies cannot be built without good 
leadership, without economies based on sound market principles, 
and without significant investments in health and education.
    The MCA will provide aid designed to jump start rapid 
economic growth in low-income countries that pursue sound 
policies. By establishing firm criteria to measure and reward 
the progress of low income nations in these areas, the MCA can 
provide a powerful incentive to foreign governments to embrace 
and to sustain reform.
    As we encourage nations on every continent to join us in 
reshaping the world, the MCA would put our money where our 
mouth is. The President's proposal envisions $1.3 billion for 
the account this year, with an increase to $5 billion by its 
third year.
    The President should be commended for proposing this new 
and creative departure in our foreign assistance programs. He 
is demonstrating a strategic understanding of the broader fight 
against terrorism and the altruistic American desire to help 
others achieve the prosperity that we are fortunate to enjoy in 
this country.
    As we begin our deliberations on granting the President 
authority to establish the MCA, I would offer the following 
guidelines.
    First, the MCA cannot be funded at the expense of other 
programs. Top priorities, such as HIV/AIDS funding and food 
programs for the hungry, cannot take reductions to make room 
for MCA funding. Neither can assistance be reduced to key 
countries like Afghanistan, which are unlikely to qualify at 
this stage for MCA participation.
    Second, an optimal division of labor must be found between 
MCA and the United States Agency for International Development. 
Failing or failed States need more attention, not less, and 
USAID must be given the resources to address these complex 
situations.
    Third, the Administrator of USAID or his representative 
should have a place on the board of the MCA. USAID has 
experience developed over decades that should be included in 
the expertise undergirding the MCA.
    Other central questions that we will address today include 
how the MCA might coordinate with other bilateral or 
multilateral donors, whether it will need to have 
representatives in the field and whether it will be useful for 
outside experts to serve on its board.
    To examine these and many other questions, we are fortunate 
to have two expert panels with us today. From the 
administration, we will be hearing from Alan Larson, the Under 
Secretary of State for Economic, Business, and Agricultural 
Affairs; John Taylor, the Under Secretary of the Treasury for 
International Affairs; and Andrew Natsios, the Administrator of 
the Agency for International Development.
    On the second panel, we have three distinguished citizens 
from the private sector: Dr. Steven Radelet, Ms. Mary 
McClymont, and Ms. Susan Berresford. We welcome you all and we 
look forward to your insights. And I call upon now in the order 
that I introduced you--and first of all, Under Secretary 
Larson--for your testimony.

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

    Mr. Larson. Thank you very much, Mr. Chairman and Senator 
Hagel, it is a great honor to testify on behalf of the 
Millennium Challenge Account. I do have a statement for the 
record, but with your permission----
    The Chairman. It will be published in full and I would say 
this to all the witnesses, your statements will be published in 
full, and we would ask you to summarize as appropriate.
    Mr. Larson. Perfect. Mr. Chairman, last March, President 
Bush caught the world's attention when he called for ``a new 
compact for global development'' that would link greater 
contributions from developed countries to greater 
responsibility from developing countries.
    It was not just the amount of money that attracted 
interest. It was also the fact that the Millennium Challenge 
Account brought together lessons about development learned over 
the last 50 years.
    The MCA targets countries that govern justly, invest in the 
health and education of their own citizens, and encourage 
economic freedom. By focusing on those countries whose own 
policies encourage growth, MCA assistance will deliver much 
greater economic development. And for those countries that do 
not initially qualify, it provides a strong incentive to adopt 
growth-enabling policies.
    The MCA proposes a true partnership, one in which 
participating, developing countries with the full involvement 
of their own citizens will set forth their own priorities and 
propose their own projects. And the MCA insists on results.
    We will have business-like contracts with each partner, and 
we will invest our resources in well-implemented programs that 
have clear objectives and built-in performance benchmarks.
    To realize the President's vision, the administration's 
development team, including the three of us at this table, 
engaged in an intensive, year-long process of policy 
formulation. We received thoughtful suggestions from many, 
including NGOs and the business community.
    Throughout, President Bush and his Cabinet gave 
unprecedented direct and sustained attention to the MCA and to 
development issues more generally. After a year of 
deliberation, we come to you with a number of conclusions 
reflected in the legislation before you.
    First, the MCA should focus on promoting economic growth 
and developmental outcomes in countries with good policies.
    Second, the MCA must complement, not replace other 
assistance. In fact, the President seeks to expand other 
assistance programs that provide famine relief, that combat 
HIV/AIDS, or that help strategic partners. The MCA will not 
come at the expense of USAID.
    Third, the MCA must have a strict and transparent selection 
process. We have chosen 16 publicly available indicators to 
help in forming decisions about which countries will 
participate. Secretary Powell and the administration are 
committed to keeping the MCA firmly focused on development.
    Fourth, the MCA should be administered by a separate 
corporation. Combining all of the new elements--selective 
qualification, partnership, giving developing countries the 
lead, a business approach that measures results from the 
beginning to the end--all of this requires a new approach. The 
legislation therefore creates a lean Millennium Challenge 
Corporation 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.
    Fifth, the MCA needs a clean, flexible, legislative 
mandate. If it is to respond to developing country priorities, 
the MCA cannot be earmarked. To attract the best and the 
brightest personnel in public, private, and non-profit sectors, 
the MCA must have special personnel authority. To be lean and 
efficient, it must have the ability to contract broadly for 
services.
    Sixth, the MCA must be accountable and coherent with other 
development programs. As chairman of the board of directors, 
Secretary Powell ensures--intends to ensure that the MCA is 
accountable to the President and to the Congress, and is well 
coordinated with the activities of USAID, which he also 
oversees.
    Mr. Chairman, I would like to close on a personal note. My 
involvement with developing countries began 32 years ago as a 
school teacher in a self-help school in Kenya. Since then, as a 
diplomat, first in Sierra Leone, then in Zaire, then in 
Jamaica, I have run small assistance programs and promoted 
development initiatives like the Carribean Basin Initiative.
    On trips to every corner of the world, I have had an 
opportunity to observe a wide variety of developmental 
strategies. I am convinced that the proposal before this 
committee today is the most thoughtful and important American 
development initiative to be advanced in the last 32 years.
    It is built on American values, embracing both our 
compassion and also our insistence on practical results. It 
comes at a time when our Nation is engaged in a war against 
global terrorism. Yet even 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.
    I urge the committee to give the Millennium Challenge Act 
of 2003 its full support. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Secretary Larson.
    [The prepared statement of Mr. Larson follows:]

 Prepared Statement of Hon. Alan Larson, Under Secretary of State for 
               Economic, Business and Agriculture Affairs

    Mr. Chairman, members of the committee, I am pleased to appear 
before you to testify in favor of the establishment of the Millennium 
Challenge Account (MCA).
    Last March, President Bush described an exciting new approach to 
development assistance. He called for ``a new compact for global 
development'' linking ``greater contributions from developed nations'' 
to ``greater responsibility from developing nations.'' The United 
States would lead by example, the President pledged, and increase core 
development assistance by 50 percent over the next three years--an 
increase of $5 billion per year by the third year. A Millennium 
Challenge Account would channel this new assistance only to ``nations 
that govern justly, invest in their people, and encourage economic 
freedom.''
                  why a millennium challenge account?
    Mr. Chairman, this new foreign assistance initiative, the 
Millennium Challenge Account, brings together in a new and innovative 
way the lessons we have learned about development over the past 50 
years.

   It affirms that economic growth is key to development and 
        targets assistance at those countries that have adopted the 
        governance, health, education and economic policies that enable 
        growth. In this way, the MCA increases the odds of spurring 
        successful economic development and, at the same time, 
        encourages more countries to adopt growth-enabling policies.

   It recognizes that development must primarily come from 
        within, not conferred from the outside. No one can develop a 
        country except its own people. The MCA thus proposes a true 
        partnership in which the developing country with full 
        participation of its citizens proposes its own development 
        priorities and plans.

   It insists on results. Funds will go to those countries that 
        have the best proposals--with clear objectives and benchmarks--
        and those that best implement their programs.
    The MCA builds on the promise of the global economy and the spread 
of democratic institutions. It rests on the greater recognition by 
developing countries that their policies and governance are the most 
critical keys to development. The MCA is not the sole answer. it is 
part of a broad array of Administration efforts to spur development 
that stretch from the Doha Development Agenda to initiatives on HIV/
AIDs, famine and education. Along with these other efforts, the MCA 
supports our overall foreign policy, including the struggle against 
terrorism, by encouraging free, democratic and prosperous societies 
where people have a stake in the future and value partnership with the 
United S States.
    The Administration's vision of the MCA, as reflected in the 
legislation sent forward to the Congress on February 3, is profoundly 
positive. It affirms the ability of the poorest people in the poorest 
countries to improve their lives; it embraces human dignity by 
stressing mutually responsible and accountable partnership; and it 
upholds the key insight that thoughtful and participatory political and 
economic governance are fundamental to lasting progress.
                           developing the mca
    This past year our challenge has been to implement the vision that 
the President put forward last March in Monterrey. In so doing, we have 
engaged in an intense, thoughtful and collegial interagency process 
involving the Departments of State and Treasury, the U.S. Agency for 
International Development, the Office of Management and Budget, the 
National Security Council, and a number of other agencies. We have also 
benefited greatly from the strong interest and suggestions of many, 
including from Members of Congress and staff. The public, especially 
the NGO and business communities, have been vital advisors and sounding 
boards. We have kept other donor nations and potential MCA beneficiary 
countries apprised, as both have welcomed the MCA and been keen 
observers of our progress. Throughout this process, the involvement of 
the President has been central. President Bush has given an 
unprecedented level of direct and sustained commitment to the MCA and 
to development issues more generally.
    After months of discussion and deliberation, the Administration 
came to a number of conclusions:

   The MCA should focus on development objectives;

   It must complement, not replace current assistance;

   To ensure we select only those countries that can best use 
        assistance, the MCA requires the integrity of objective 
        eligibility criteria;

   To combine all the new elements--a selective program, 
        partnership that gives developing nations themselves the lead 
        role in guiding their development, and a program where results 
        are integrated and measured from beginning to end--we decided 
        that the MCA could not just be grafted onto existing assistance 
        programs or structures;

   We also concluded that to realize the promise of the MCA 
        without a huge increase in bureaucracy, we will have to 
        organize and run the MCA in a whole new way, requiring a clean, 
        flexible and creative legislative mandate.
                          legislative overview
    Mr. Chairman, to make this vision a reality, the legislation before 
you would create a new organization--the Millennium Challenge 
Corporation (MCC)--with one key goal: ``to reduce poverty through 
promoting sustained economic growth in developing countries committed 
to implementing good policies.'' A Chief Executive Officer nominated by 
the President and confirmed by the Senate would run the MCC. A cabinet-
level board, chaired by the Secretary of State, would provide policy 
guidance and oversee operations. This will ensure policy consistency 
and coordination between the MCA and other foreign assistance, which by 
law the Secretary of State supervises.
    Selection: Only poor countries will be eligible for the MCA. In FY 
2004, countries eligible to borrow from the International Development 
Association (IDA), and which have per capita incomes below $1,435, (the 
historical IDA cutoff) will be considered. As funding expands, we would 
also gradually expand the countries eligible for participation in the 
MCA. In 2005, all countries with incomes below $1,435 will be 
considered. In 2006, all countries with incomes up to $2,975 (the 
current World Bank cutoff for lower middle income countries) will be 
eligible.
    At the heart of the MCA is a challenge to countries to create and 
maintain the policy and institutional environment that underpins 
lasting development and makes assistance truly effective. We have 
therefore based MCA qualification on these criteria and have chosen 16 
indicators, falling into three baskets: ruling justly, investing in 
people and encouraging economic freedom. In order to participate in the 
MCA, countries would be expected to do better than the median on half 
the indicators in each category. We will give special attention to the 
corruption indicator, since corruption has such a corrosive effect on 
democratic institutions and developmental achievement.
    The sources for these indicators, and the data for evaluating them, 
will be publicly available. By giving countries access to the 
information they need to qualify, the MCA helps to give poor countries 
incentive and direction to develop the policies required. The 
indicators come from independent and analytically rigorous sources, 
including the multilateral development banks, academic policy 
institutes, international financial institutions and non-profit 
organizations. When countries create the policies to meet these 
indicators, they will create the conditions friendly to sustained 
economic growth.
    We know that indicators cannot capture all critical aspects cf a 
country's performance in these areas and may not be fully up to date. 
The legislation addresses this by providing for discretion by the Board 
of Directors to exercise final judgment as to which countries will 
qualify. Secretary Powell and this administration are absolutely 
committed to keeping the MCA focused on development, with the basis for 
qualifying reflected in the President's three categories. We have other 
tools, including development assistance and economic support funds, to 
address other important national goals.
    Implementation: To implement the partnership between the MCA and 
MCA countries, the MCA will use time-limited, business-like contracts 
that represent a commitment between the United States and the 
developing country to meet agreed performance benchmarks. Developing 
countries will set their own priorities and identify their own greatest 
hurdles to development. They will do so by engaging their citizens, 
businesses and government in an open debate, which will result in a 
proposal for MCA funding. This proposal will include objectives, a plan 
and timetable for achieving them, benchmarks for assessing progress and 
how results will be sustained at the end of the contract, delineation 
of the responsibilities of the MCA and the MCA country, the role of 
civil society, business and other donors, and a plan for ensuring 
financial accountability or funds used. The MCA will review the 
proposal, consulting with the MCA country. The Board will approve all 
contracts.
    To be most effective in promoting development, the MCA will need 
flexible authorities with regard to funding, personnel, procurement and 
contracting. The MCA will fund programs to promote economic growth. We 
envision a focus on areas such as agricultural development, education, 
enterprise and private sector development, governance, health, and 
trade and investment capacity building, but to be able to respond to 
MCA country proposals, the MCA should not be restricted to specific 
areas of funding.
    The Millennium Challenge Corporation will draw its staff from the 
best and brightest in the public, private and non-profit sectors. We 
envision a relatively small staff, which would serve for time-limited 
terms. The staff would rely heavily on contracted services for 
monitoring, evaluation and many services. The MCA will need the ability 
to contract for services with the private sector, with government 
agencies, and with international organizations and should be able to 
procure globally.
    Funding: The initial funding request for the MCA is $1.3 billion. 
This is the first stage of a ramp-up that will increase to $5 billion 
by 2006. That is a 50 percent increase in current core U.S. development 
assistance, and represents an unprecedented effort to reduce poverty. 
We believe $1.3 billion will provide sufficient resources for a strong 
start. We deliberately chose to ramp up requests over time to ensure 
funds would match but not exceed our ability to use them well.
    Operation: Mr. Chairman, we know that the keys to success of any 
initiative as innovative as the Millennium Challenge Account lie not 
only in ensuring that it has a well thought out mandate and the needed 
authorities. It must also operate well. We have sought to give the MCA 
a unique identity so that it will work well with other agencies that 
deliver development assistance. We have kept its staff small, so that 
it will rely on other agencies in the field and in Washington. We have 
placed MCA officials in the field under Chief of Mission authority to 
ensure that they coordinate well with other Embassy elements, including 
the AID mission. And to ensure accountability, the Secretary of State, 
who oversees all of our foreign assistance programs, will serve as 
Chairman of the Board.
    USAID will continue to be central to U.S. foreign assistance. The 
Administration is working hard to bring forward new development 
initiatives on agricultural development, famine, HIV/AIDS, rural 
poverty, trade capacity building and humanitarian relief. Under the 
committed leadership of Administrator Natsios, USAID will not only have 
a growing role in these new development assistance initiatives, but it 
will also be a key partner of the MCA and the implementing agency for 
many MCA programs. In fact, USAID programs will work in partnership 
with the MCA to provide technical assistance and other funding for 
those countries that are ``near qualifiers,'' so that they can make the 
policy changes necessary to qualify for the MCA.
                        what the mca can achieve
    Mr. Chairman, in conclusion, the Millennium Challenge Account is an 
innovative effort to spark international development that deserves 
support. While many of the elements of the MCA are not new, this will 
be the first attempt to integrate them into a concept that challenges 
countries to adopt policies that enable development, that challenges 
aid recipients to take the lead in a new form of partnership, and that 
challenges us and MCA countries alike to adopt a business-like, 
results-oriented approach. The MCA's goal and mission are clear: to 
raise countries out of poverty by promoting sustained and broadly 
shared economic growth.
    The Millennium Challenge Account is a key element of the overall 
U.S. effort to address poverty and development, which must also include 
existing programs of AID and others to provide humanitarian assistance 
and famine relief, fight HIV/AIDs, build trade capacity, and provide 
for economic stability and defense of key partners. We are convinced 
that the MCA is in our national interest. Greater prosperity in the 
developing world will alleviate the poverty that breeds discontent and 
instability. It will expand markets for American exports. It will 
reduce the spread of disease and pestilence. The Millennium Challenge 
Account will promote our own security and well-being even as it brings 
a better life to millions around the globe.
    Mr. Chairman, members of the committee, I request your speedy and 
favorable consideration of the ``Millennium Challenge Act of 2003.''

    The Chairman. Under Secretary Taylor.

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

    Mr. Taylor. Thank you very much, Mr. Chairman and Senator 
Hagel for inviting me to testify on this very important and 
innovative initiative of President Bush's.
    The Millennium Challenge Account is designed, as you 
indicated, Mr. Chairman, to reduce poverty and to raise income 
per capita around the world. And it is designed to do that by 
increasing economic growth and in particular by increasing 
productivity growth.
    Productivity growth represents the ability for people to 
produce more goods and services. That ability to produce more 
is the source of rising incomes and reduction in poverty 
wherever it has occurred.
    In countries where productivity growth has been strong, 
those countries have begun to catch up, even some have caught 
up to the wealthier countries. In countries where productivity 
growth is low or nonexistent, those are still the countries 
that are behind, in which there is still immense poverty. So 
the idea here, we think, is that by raising growth, we can take 
a real stab at poverty reduction.
    The Millennium Challenge Account endeavors to raise 
economic growth by focusing on the policies that encourage 
economic growth, that bring down the impediments to investment 
flows, to technology flows that can raise productivity.
    And as President Bush has stated, there are three types of 
policies that do this--policies that represent governing 
justly, policies that represent investing in people, and 
policies that represent encouraging economic freedom.
    It is by encouraging such policies that the Millennium 
Challenge Account will raise economic growth.
    The second part of the Millennium Challenge Account, as 
Under Secretary Larson has emphasized, is an insistence on 
measuring results, measuring the impact of the assistance as 
best as we possibly can.
    And, of course, the third part of it is to actually 
increase the amount of assistance, as you have indicated, Mr. 
Chairman.
    In my remarks here, I would like to focus on the way in 
which we are implementing the part of the program and the 
account that focuses on the policies that raise economic 
growth.
    As Under Secretary Larson indicated, during the last year, 
there has been an extensive effort inter-agency in the U.S. 
Government, consultations with the Congress, consultations with 
other groups to develop a method to measure good economic 
performance and the policies that will raise growth. And on the 
basis of that--those consultations we have selected 16 
indicators of policies that will raise economic growth.
    In looking for these, we have looked at explicitly policies 
that we think correlate well with higher growth. We have looked 
at indicators that cover a large number of countries. We have 
looked for indicators that are widely available and for which 
there is transparency. And we have looked for indicators that 
are objective and sound as best that we can.
    These indicators, which I will just briefly review, are not 
set in stone. We think they are good--very good indicators. But 
as the Millennium Challenge Account develops, there may be 
changes in the indicators themselves.
    But just to review briefly, the 16 indicators cover 
governing justly, investing in people, and encouraging economic 
freedom. There are a total of six in the first category of 
governing justly. Two of them have been developed by Freedom 
House and have a long history. One is based on civil liberties, 
the other is based on political rights.
    Four of the other indicators in the governing justly 
category have been developed by the World Bank Institute, and 
they cover issues such as the rule of law, measuring 
corruption, which is extraordinarily important from the point 
of view of encouraging economic growth, combating corruption.
    There are four indices that we have focused on in the 
investing in people category. Two relate to health and two 
relate to education. For the education part, we look at the 
amount that a country devotes as a share of GDP toward 
education.
    That is, of course, not the only indicator of good 
investing in people and education. Another measure is the 
completion rate for young children in school, what is the 
completion for--a rate for them as they finish school.
    With respect to health, again, a measure of the spending as 
a share of GDP on health. But since spending is not a sole 
measure of commitment by a country, we also want to look at the 
effectiveness as measured by the immunization rates with 
respect to certain important diseases.
    With respect to encouraging economic freedom, there are a 
total of six indices, such as openness to trade, an index 
developed by the Heritage Foundation; an index of how long it 
takes to startup a business. That is a commitment to policies 
that we think are essential for economic growth.
    We have a measure of good macroeconomic policies, keeping 
inflation low and stable, and keeping the budget deficit in 
line.
    So based on these 16 indicators, we think we have found a 
reasonably objective way and a transparent way to measure 
policies that the countries are taking. Now, when these data 
are used, there are going to be gaps occasionally in them. They 
are not going to be perfect.
    So the Millennium Challenge Corporation, when they use 
these data, will have to exercise some judgment in coming to 
conclusions of which countries are succeeding. What we have 
suggested in this is that countries have to be above the median 
in half of the indices in each category. That allows for some 
flexibility and for some judgment. But it is a rigorous 
objective way to apply the indices.
    I think the most important thing about the indices is they 
are very transparent. They can be obtained from Web sites. 
People can do their own calculations to see how countries stand 
up. And perhaps most important, the countries themselves can 
see how they stand up.
    I want to just mention briefly the other part of the 
Millennium Challenge Account and Corporation which is so 
important, and that is the emphasis on measuring results.
    We expect that every contract will have outcomes that 
specify what is supposed to be accomplished in each country and 
each project. There will be specific baseline data of where 
things are at the start so that you can see what the 
improvements are.
    And we would like the projects to be structured in a way 
such that it can be stepped up or changed or cut back depending 
on how progress is made so we can actually make adjustments if 
the goals are not being achieved. So by measuring results by 
insisting on performance and by actually increasing the amount 
of funding, we feel that the President's initiative can be more 
effective than any in the past in achieving the goals of 
raising economic growth and reducing poverty.
    We feel the Millennium Challenge Account represents our 
country's greatest opportunity to transform the rhetoric of 
measurement and the rhetoric of development effectiveness into 
an operational action plan and we urge your favorable 
consideration of the Millennium Challenge Account Act of 2003. 
Thank you, Mr. Chairman.
    The Chairman. Well, thank you very much, Secretary Taylor.
    [The prepared statement of Mr. Taylor follows:]

   Prepared Statement of Hon. John B. Taylor, Under Secretary of the 
     Treasury for International Affairs, Department of the Treasury

    Chairman Lugar, Senator Biden, Members of the Committee, thank you 
for the opportunity to testify today on the Millennium Challenge 
Account (MCA). My statement will focus on the economic rationale behind 
the MCA and how it fits well with the Administration's approach to 
development.
    Today there are more than one billion people living on less than $1 
a day and nearly three billion living on less than $2 a day. In 
addition to the tragedy of those living in extreme poverty are those 
whose lives are claimed by ailments virtually unseen in the U.S. Last 
year alone 3 million people died for lack of immunization, 1 million 
died from malaria, 3 million died from water-related diseases, and 2 
million died from exposure to stove smoke inside their own homes. In 
addition, HIV/AIDS has ravaged the populations of developing nations, 
killing 3 million people in 2302 alone.
    The United States is helping in many ways to combat these problems. 
The MCA is part of the Administration's overall development strategy, 
as Administrator Natsios and Under Secretary Larson describe in their 
testimony. The MCA is designed specifically to catalyze the policy 
reforms that are the foundation of economic growth and poverty 
reduction.
             development assistance and productivity growth
    Sustainable poverty reduction can only be achieved via economic 
growth, which is primarily determined by productivity growth. 
Productivity is the amount of goods and services that a worker produces 
per unit of time with the skills and tools available. If you want to 
reduce the number of countries with low per capita incomes, then you 
have no choice but to increase productivity in those countries. And the 
higher the rate of productivity growth, the faster poverty will 
decline. Simply put, the ticket out of poverty is higher productivity 
jobs.
    Productivity depends on two things: capital per worker and the 
level of technology. If there are no impediments to the flow and 
accumulation of capital and technology, then countries that are behind 
in productivity should have a higher productivity growth rate. They 
should catch up, and we have seen many countries catching up over the 
years--such as South Korea, Chile, and Botswana. However, many of the 
poorest nations still have had low and stagnant productivity and 
income, and they are not catching up. More and more evidence has been 
accumulating that this is due to significant impediments to investment 
and the adoption of technology.
    These impediments can be grouped into three areas. First, poor 
governance--the lack of rule of law or enforceable contracts and the 
prevalence of corruption--creates disincentives to invest, start, up 
new firms, and expand existing firms with high-productivity jobs. This 
has a negative impact on capital formation and entrepreneurial 
activity. Second, weak health and education systems impede the 
development of human capital. Workers without adequate education do not 
have the skills to take on high-productivity jobs or to increase the 
productivity of the jobs they do have. Third, too many restrictions on 
economic transactions prevent people from trading goods and services or 
adopting new technologies. Poor economic policies, state monopolies, 
excessive regulation, and the lack of openness to trade are all 
examples of restrictions that reduce the incentives for innovation and 
investment that are needed to boost productivity.
    The Administration's approach to assisting developing nations to 
overcome these impediments and thereby increase their productivity 
growth is to increase aid, reward better performance, and measure 
results. All three must be simultaneously implemented; two of three 
alone would not succeed. As the MCA clearly represents a significant 
increase in aid levels, I want to focus on how the MCA will reward 
better performance and measure results.
                      rewarding better performance
    President Bush's vision of the MCA recognizes the importance of 
rewarding pro-growth policies. He categorizes these policies as ruling 
justly, investing in people and encouraging economic freedom. The MCA 
provides an incentive for countries to adopt good policies that will 
benefit them in three distinct ways:

          (i) These policies, in and of themselves, will increase 
        growth;

          (ii) These policies will create an environment conducive to 
        foreign and domestic investment; and

          (iii) Development assistance will be more effective in good 
        policy environments.

    Following President Bush's leadership, the Administration sought to 
develop a set of indicators that will be used to measure a country's 
commitment to pro-growth policies. An interagency group with 
representatives from Treasury, State, USAID, OMB, Commerce, CEA and NSC 
worked intensively for several months evaluating a wide range of 
possible indicators. As part of this process, we met with 
representatives from other donor countries, developing countries, non-
governmental organizations (NGOs), universities, think tanks, the 
private sector, and other interested parties to gather their ideas.
    As a first step we needed to decide which set of countries would be 
eligible to compete for MCA funds. Our proposal is to expand the number 
of countries eligible as funding ramps up. In FY'04, countries eligible 
to borrow from the International Development Association (IDA), and 
which have per capita incomes below $1,435 (the historical IDA cutoff), 
will be considered. This is currently 74 countries. In FY'05, all 
countries with incomes below $1,435 will be considered, which adds 
another 13 countries. In FY'06, all countries with incomes up to 
$2,975--the current World Bank cutoff for lower middle income 
countries--will be eligible to compete as a separate pool. This group 
currently consists of 29 countries. It is important to note that 
countries prohibited from receiving assistance by current statutory 
restrictions will not be eligible.
    Eligible countries will qualify for funding based on their policy 
performance in the categories of ruling justly, investing in people and 
encouraging economic freedom. In an attempt to objectively quantify 
performance in these three categories, we considered a variety of 
potential indicators.
    Ultimately, we selected 16 based on their relationship to growth 
and poverty reduction, the number of countries they cover, their 
transparency and availability, and their relative soundness and 
objectivity. These indicators are not set in stone and may change in 
the future if problems with them emerge or better indicators become 
available. To qualify as a better performer, a country will have to be 
above the median on half of the indicators in each of the three policy 
areas.
Governing Justly:
    There is a growing literature on the importance of strong political 
institutions and good economic governance to successful development.
    (1) Civil Liberties: Freedom House evaluates freedom of expression, 
association and organizational rights, rule of law and human rights, 
and personal autonomy and economic rights.
    (2) Political Rights: Freedom House also evaluates the prevalence 
of free and fair elections of officials with real power; the ability of 
citizens to form political parties that may compete fairly in 
elections; freedom from domination by the military, foreign powers, 
totalitarian parties, religious hierarchies and economic oligarchies; 
and the political rights of minority groups.
    (3) Voice and Accountability: The World Bank Institute has designed 
a set of indices that aggregates existing quantitative assessments of 
governance from a broad range of sources. One of these indices attempts 
to measure a country's ability to protect civil liberties, the extent 
to which citizens of a country are able to participate in the selection 
of governments, and the independence of the media.
    The policies incorporated in the previous three indicators should 
be seen as ends in their own right apart from their impact on growth. 
Additionally, freedom of expression and of the media allow civil 
society to effectively monitor the government and reduce corruption and 
more subtle rent-seeking behavior. Free and fair elections make 
governments accountable to the entire country rather than to a narrow 
power base, thus making them more responsive to development needs.
    The remaining three indicators are produced by the World Bank 
Institute. These indices are formed by aggregating surveys from 15-20 
different sources, similar to Voice and Accountability:
    (4) Government Effectiveness: Good governance includes the 
provision of quality public services, civil servants who are competent 
and independent from political pressures, and credible governments that 
make good on their commitment to produce and implement sound policies 
and deliver public goods.
    (5) Rule of Law: This index attempts to measure the extent to which 
people have confidence in and abide by rules of society, the incidence 
of violent and non-violent crime, the effectiveness and predictability 
of the judiciary, and the enforceability of contracts.
    (6) Control of Corruption: With respect to this indicator, 
President Bush made it clear that MCA funds should only go to the most 
transparent and least corrupt countries. To meet the President's 
concerns, we have determined that those countries which fall below the 
median on this indicator will be considered ineligible for MCA funds, 
absent material change in their circumstances.
Investing in People:
    In terms of measuring a country's commitment to educating its 
citizenry and providing basic health care, we were particularly 
concerned that a country's income level not preclude it from 
qualifying, yet we also wanted to provide an incentive for countries to 
focus on key policies that contribute to growth. Our proposal, 
therefore, includes two budgetary input measures, which governments can 
control and rapidly change. However, more money does not always lead to 
better results. Consequently, we have included two output measures that 
more accurately reflect improvement in the policy environment over time 
and are key to sustainable development.
    (1) Public expenditure on health as a percent of GDP: These data 
are being provided directly by the recipient government.
    (2) Immunization rate for DPT and measles: The UN's World Health 
Organization publicly compiles and annually releases data on 
immunization rates for nearly all member countries. Immunization rates 
can be associated with growth because labor productivity increases when 
workers are not out sick or caring for ill family members.
    (3) Total public expenditure on primary education as a percent of 
GDP: These data are being provided directly by the recipient 
government.
    (4) Primary Completion Rate: The World Bank and UNESCO compile data 
that measure whether children are attaining minimum education levels. A 
higher level of education increases labor productivity.
Encouraging Economic Freedom:
    The MCA will measure a country's level of economic freedom based on 
its performance in implementing prudent macroeconomic and microeconomic 
policies, as well as creating the conditions necessary to attract 
investors.
    (1) Country Credit Rating: Institutional Investor magazine produces 
a semi-annual survey of bankers' and fund managers' perceptions of a 
country's risk of default. Our belief is that such a survey is an 
important indicator of the views of the private sector. In addition, an 
improved credit rating usually leads to a lower cost of capital and 
greater domestic and foreign direct investment.
    (2) Inflation: High inflation distorts relative prices and 
discourages long-term investments. Also, as the poor hold a higher 
percentage of their wealth in cash, they are disproportionately hurt by 
the erosion of their purchasing power. Of the 16 indicators, this is 
the only one where performance is not judged relative to the median. 
Instead, a country must have inflation of less than 20% in order to 
pass the indicator.
    (3) Budget Deficit/GDP: As a measure of fiscal policy, we use a 
country's overall budget deficit averaged over a three-year period. The 
data for this measure will be provided directly by the recipient 
government, cross-checked with other sources, and made publicly 
available. Among other impacts on growth, a high budget deficit crowds 
out private sector investment and can lead to inflation.
    (4) Days to start a business: The Private Sector Advisory Service 
of the World Bank Group works with local lawyers and other 
professionals to examine specific regulations that impact business 
investment. One of their studies measures how many days it takes to 
open a new business. Bureaucratic barriers to business formation that 
go beyond protecting society not only hinder entrepreneurship but may 
exist to preserve the economic rents of political cronies.
    (5) Trade Policy: The Heritage Foundation's Index of Economic 
Freedom measures a country's openness to international trade based on 
average tariff rates and non-tariff barriers to trade. Open economies--
those with low to moderate trade barriers and exchange controls--tend 
to grow faster than more closed economies.
    (6) Regulatory Quality Rating: The World Bank Institute (see 
section above on Governing Justly) measures the burden on business 
arising from, among others, licensing requirements, labor regulations, 
and bureaucratic corruption. Excessive regulations and their arbitrary 
application deter investment and raise the cost of doing business, 
thereby hindering job creation and reducing growth.
    While these indicators meet all of our criteria, there may still be 
gaps or lags in the data, or trends not reflected in the data, which 
may be material for assessing performance. To correct for these 
possibilities, the MCA Board of Directors will look behind the numbers 
to make a final recommendation to the President on qualifying 
countries.
                           measuring results
    Aid effectiveness requires not only better performance but also a 
focus on measuring results. This is a core component of the 
Administration's development strategy and is one that we have pushed in 
the Multilateral Development Banks (MDBs). For example, the U.S. made 
part of its financial commitment to the IDA-13 replenishment in the 
form of an incentive contribution that will reward the World Bank for 
increasing the use of various diagnostic tools (such as reviewing the 
policies of developing countries in the areas of financial 
accountability, procurement, public expenditure management, and poverty 
analysis) as well as making progress towards a set of development 
indicators (in health, education, and private sector development). The 
agreement also called for the initiation of a performance measurement 
system which will develop ultimately into a common set of outcome 
indicators that can be compared across countries.
    The MCA furthers this focus on measuring results by making 
accountability for results an integral part of every activity for which 
MCA funds are used. Americans are by nature a generous people but they 
want to see results from their funds that are devoted to development, 
and their support for providing foreign assistance will only increase 
if those results are demonstrated in a convincing and straightforward 
manner. By measuring concrete results, we can focus our efforts on what 
really matters: helping poor people around the world escape from 
poverty and lead better lives. The approach helps us cut through 
bureaucratic layers, ignore non-essentials, and concentrate on 
development problems that must be solved. It is a way to maximize the 
benefits of our funds.
    MCA contracts will state in quantitative terms the expected 
outcomes of individual activities and overall country assistance. We 
will require a clear strategy for gathering baseline data and measuring 
progress towards stated results and assessing the reasons for success 
and failure. We will also require projects to be structured in a way 
that steps up or cuts back funding contingent on achieving results. In 
addition, evaluation of results will allow the MCA to incorporate 
lessons learned into ongoing and future operations. In keeping with the 
MCA's commitment to transparency, all monitoring and evaluation 
reports, as well as the terms of each contract, will be made public in 
the U.S. and in the host country. Furthermore, we will continue to 
monitor country commitment to MCA selection criteria.
    In addition to sector specific monitoring, we will also be 
concerned with the broader policy environment. The Millennium Challenge 
Corporation will monitor overall budget data to determine whether 
recipient governments are using MCA resources in a complementary manner 
with their own domestic and other development resources.
    Coordination of assistance with other donors will be vital to the 
success of the MCA. Each recipient country will be responsible for 
managing coordination among the MCA and other donors to maximize impact 
and avoid duplication of efforts. The effort to align MCA country 
contracts and MDB assistance with each country's Poverty Reduction 
Strategy Paper (PRSP) or other development strategy will also help 
coordinate development assistance.
                               conclusion
    For many years, we have all heard about the importance of aid 
effectiveness. The MCA represents this country's greatest opportunity 
to transform rhetoric into an operational action plan. The MCA has the 
ability to challenge countries to demonstrate performance, to achieve 
results, and most importantly to assist their people in having a better 
opportunity to pursue a better life for themselves and their families. 
I urge your favorable consideration of the ``Millennium Challenge Act 
of 2003.''

    The Chairman. Administrator Natsios.

STATEMENT OF HON. ANDREW S. NATSIOS, ADMINISTRATOR, AGENCY FOR 
       INTERNATIONAL DEVELOPMENT [USAID], WASHINGTON, DC

    Mr. Natsios. Thank you very much, Mr. Chairman and members 
of the committee. I would first like to ask that my longer 
written testimony be put in the record. But I also would note--
--
    The Chairman. It will be published in full.
    Mr. Natsios [continuing]. That we worked on the written 
testimony a great deal. It is more than just written testimony. 
It is actually the plan that we intend to use to integrate 
USAID into the Millennium Challenge Account. So I would urge 
the staffs to examine what we have written, because we went 
through a long process to get to the written testimony.
    Thank you, Mr. Chairman and members of the committee for 
holding this hearing on the Millennium Challenge Account in 
such a timely manner. I know, Mr. Chairman, that you and other 
members of the committee, have had a great interest in what the 
President has called our moral imperative to combat world 
poverty. And I am delighted to participate in what I believe 
will be one of the most sweeping changes in foreign assistance 
funding since the Marshall Plan and the Alliance for Progress.
    I would like to thank my colleagues, Under Secretary Larson 
and Under Secretary Taylor, for their excellent summary of the 
evolution of the MCA and on key issues, which I will not 
repeat.
    USAID welcomes the MCA as a bold initiative that will 
complement our mission and provide strategic focus to U.S. 
development assistance priorities. We see USAID's role as key 
in the President's campaign to attack the scourge of poverty by 
stimulating economic growth, promoting democracy and investing 
in people. But USAID is only one piece of what is now becoming 
a more coherent and coordinated U.S. development strategy.
    For the first time, we have the opportunity to articulate 
and implement a government wide U.S. strategy that clearly and 
accurately defines our different challenges and matches the 
right tools to address them. The MCA will play a critical role 
in this process as we begin to define U.S. development 
assistance to address the very different challenges we face 
today than those that we faced during the cold war.
    Specifically, MCA puts into practice what we know works in 
development. As both my two colleagues suggested, the MCA is 
the direct outgrowth of what USAID and other development actors 
have learned over the past 40 years. Simply put, development 
assistance in poor countries that are pursuing good policies 
produces growth.
    We know that good governance, economic policies, and 
institutions are key. Country ownership of the development 
agenda is also essential. These are the foundations of the MCA.
    We also know that money alone will not correct bad policy. 
The fact that it is not the quantity of aid that counts, but 
the quality, was at the heart of the debate in Monterrey. We 
know that throwing money at the problem, or meeting ``ODA 
quotas'' is not the answer.
    The MCA recognizes that foreign aid can, at best, play a 
supporting role in a country's development. A country's 
commitment to help itself is the primary determinant of 
success.
    This is particularly true of governance. Experience has 
taught us that no amount of money can overcome corrupt local 
leaders or the absence of political will for reform. I might 
add here that one of the most powerful parts of the President's 
approach is to support the forces of reform in the developing 
world.
    Every country in the world, whether or not it is the most 
autocratic, has some force that wishes to change the society 
and reform it. And the problem frequently is that the reformers 
feel isolated. They do not have tools. I know already in 
parliaments in the developing world, this piece of legislation 
is being used to argue for immediate changes to deal with their 
problems or they will not be eligible for the MCA. So even in 
countries that are not MCA eligible, this legislation will have 
a profound effect on the policy reform process.
    It puts a tool in the hands of reformers, the very people 
we want to support to try to make the changes in their society 
so that they can get the local policies on their own without us 
forcing them to do it. And it is a very powerful tool.
    USAID will reorient its assistance programs to take into 
account the principles driving the MCA. We welcome the MCA as 
the strongest possible commitment by the administration to 
making development a core element of our foreign policy. Not 
only does it embody the right philosophy and approach to 
development, it also gives USAID the opportunity to clarify its 
role and better focus its activities within the context of a 
coordinated strategy.
    Given our strong interest in supporting and complementing 
the Millennium Challenge Corporation, USAID has been reviewing 
its portfolio to determine the best way to organize itself both 
to support the mission and operations of the MCA and to fulfill 
our mandate to help a wider range of developing countries. In 
addition to providing support that may be needed in MCC 
countries, we believe that USAID should focus activities on 
four broad categories of countries.
    The first is the countries that just miss getting into MCA. 
There are a number of countries that are just below the 
requirements in terms of the 16 indicators.
    The second are mid-way--mid-range performers with the will 
to reform, but that are a little further down in terms of 
qualifying.
    The third are failed and failing States that need post-
conflict, transition, or humanitarian assistance.
    And finally there are countries requiring assistance for 
strategic national security interests.
    For the first group of countries USAID will concentrate on 
the specific areas that require strengthening for MCA 
eligibility. For example, if a country is not investing 
sufficient resources in its people area or achieving good 
results in this area, USAID would concentrate its programs in 
that particular sector.
    In the second group of countries that are unlikely MCA 
candidates in the near future, we will assess the commitment to 
political and economic reform. Where such a commitment exists, 
we will concentrate on building local capacity and institutions 
that can support the foundation of MCA assistance.
    For those countries that lack such a commitment, we will 
continue programs that address global issues such as HIV/AIDS 
and environmental degradation, but will need to review our 
broader assistance programs.
    In the third category, USAID has responsibility for failed 
and failing States that do not lend themselves to assistance 
guided by MCA criteria. We are actively developing new 
assistance models within this particular category of country 
that will integrate emergency relief, food assistance, 
governance reform, and civil society building.
    We have restructured our humanitarian assistance bureau to 
create a new bureau called Democracy, Conflict and Humanitarian 
Assistance to put democracy and conflict offices in the same 
office as Food, Transition Assistance, and the Office of 
Foreign Disaster Assistance.
    In 2004, we have requested over $2 billion for these crisis 
countries and that is a substantial increase over what we have 
done in the past.
    Finally, USAID will continue to respond to needs in 
countries of strategic importance or where there is a 
transnational threat, recognizing that the primary objectives 
typically fall under national security and foreign policy and 
may not produce economic growth or reduce poverty. USAID will 
work quickly, flexibly, and effectively to achieve our U.S. 
Government objectives.
    Finally MCC programs will be founded on a partnership and 
driven by country demand. We stand ready to adapt our programs 
to support the MCC.
    If a country selected for MCC funding has a USAID mission 
and program, we would undertake a strategic review of the 
existing portfolio of projects. In many cases, we would see the 
USAID program transition to support the MCC contract 
specifically.
    However, there are critical global and regional threats, 
such as HIV/AIDS that would warrant continued support as they 
are. One of the ways that USAID will complement the MCC is that 
we have the ability to address regional issues, such as 
disease, water resources through watershed management, 
transport linkages, or regional trade capacity building 
measures.
    Thus the point I would like to leave with the committee is 
that USAID will not adopt a black or white approach on how we 
will relate to the MCC in every country; rather we think each 
country will be reviewed on a case-by-case basis.
    Mr. Chairman, I believe that President Bush's vision for 
assisting the developing world as embodied in the MCA creates a 
unique opportunity to prove that development done right can 
work. We urge the passage of the legislation. This concludes my 
testimony. I will be glad to answer questions.
    The Chairman. Thank you very much, sir.
    [The prepared statement of Mr. Natsios follows:]

   Prepared Statement of Hon. Andrew S. Natsios, Administrator, U.S. 
              Agency for International Development (USAID)

    Thank you Mr. Chairman and Members of the Committee for holding 
this important hearing on the Millennium Challenge Account (MCA) in 
such a timely fashion. We look forward to continued close cooperation 
with you and your committee as we move ahead to establish what I 
believe is a revolutionary new development initiative.
    I would like to thank Under Secretary Larson and Under Secretary 
Taylor for the excellent summary of the evolution of the MCA and 
analysis of key issues and philosophy that stimulated the initiative. I 
will focus my remarks on three key areas: (1) how the experience of 
USAID and other development institutions has shaped the MCA; (2) how we 
see the MCA complementing the work of USAID and refocusing USAID 
priorities; and (3) our vision for how the MCA will be implemented in 
the field.
    I would like to preface my remarks by underscoring two points made 
by Under Secretary Larson. The first point is that the process for 
developing the framework for the MCA and the legislation has truly been 
a model of interagency coordination. Thanks to the active involvement 
of key departments and agencies, we were able to coalesce the 
comparative advantages of those parts of the government already deeply 
involved in bilateral and multilateral assistance programs. The State 
Department coordinated outreach with key international and domestic 
constituencies; the Treasury Department, which has responsibility for 
the multilateral development banks, played a central role in developing 
the indicators; USAID, based on its extensive field experience, offered 
ideas and proposals on the framework and implementation of the MCA. 
Together, our ideas have been drawn on, and in many cases adopted, as 
fundamental principles of the proposed new account.
    I would also like to underscore the point that we need to see the 
MCA as only one piece of an unprecedented and concerted commitment of 
President Bush to increase and improve the effectiveness of foreign 
assistance. It began with his efforts to forge a new international 
consensus on development at the Monterrey Financing for Development 
Conference a year ago and the proposal for the MCA. At the heart of 
that consensus is that the donor countries will work to mobilize more 
money for development, while developing countries take more 
responsibility for creating a sound policy environment. Last month the 
President submitted a budget to Congress requesting a dramatic increase 
in the 150 account of development and humanitarian assistance from $7.7 
billion in Fiscal Year 2002 to over $18 billion by Fiscal Year 2008. 
Much of that increase will go toward urgent crises, such as stemming 
the global HIV/AIDs pandemic. But it also includes as much as $20 
billion for MCA, beginning with $1.3 billion in Fiscal Year 2004 and 
stabilizing at $5 billion per year by Fiscal Year 2006. It is clear 
that this Administration has taken development off the back burner and 
placed it squarely at the forefront of our foreign policy.
    From the perspective of USAID, the MCA is a welcome and bold 
initiative that will complement and provide a model for our mission. We 
see USAID's role as key in the President's all-out campaign to attack 
the scourge of poverty by stimulating economic growth, promoting 
democracy and investing in people. But USAID is only one piece of what 
is now becoming a more coherent and coordinated United States 
development strategy. For the first time, we have the opportunity to 
articulate and implement a U.S. strategy that clearly and accurately 
defines our different challenges and matches the right tools to address 
them. MCA will play a critical role in this process as we begin to 
redefine U.S. development assistance to address the very different 
challenges we face today.
                          the roots of the mca
    The MCA symbolizes a dramatic turning point, both in putting into 
practice what we know works in development and in elevating development 
as a fundamental aspect of our foreign policy. As both Under 
Secretaries Larson and Taylor suggested, the MCA is the direct 
outgrowth of what USAID and other development actors have learned over 
the past fifty years. We not only have considerable first-hand 
experience about what has worked and what hasn't, but we also have the 
benefit of considerable recent analysis by the World Bank and leading 
analysts that support this experience. Put simply, economic development 
assistance in poor countries works best when you are pursuing good 
policies that are conducive to growth. We know that good governance, 
policies and institutions are key; real country ownership is also 
essential. And we know that performance must be measured using rigorous 
and unbiased indicators. These are the foundations for the MCA.
    A recent World Bank paper summarizes the key themes of what has 
become a consensus among development specialists worldwide: ``The 
collective record of the past yields three main lessons. First, good 
development outcomes require good policies and institutions. Second, if 
development progress is to be sustained, the underlying policies and 
institutions must be country-owned and country-specific. Third, when 
these conditions are in place, development assistance can be highly 
effective.'' The MCA criteria of good governance, economic freedom, and 
sound investments in people are indicative of the policies and 
institutions that determine a country's development success.
    We know that money will not solve the problem of bad policy. The 
fact that it is not the quantity of aid that counts, but the quality, 
was at the heart of the debate in Monterrey. We know that throwing 
money at the problem, or meeting ``ODA quotas'' is not the answer. The 
MCA also recognizes that foreign aid can, at best, play a supporting 
role in a country's development; a country's commitment to help itself 
is the primary determinant of success. We know that private capital 
flows far outweigh development assistance, and that in the age of 
globalization, developing countries can undertake reforms that value 
private trade and investment for development.
    We believe a key aspect of persuading countries to improve their 
policies or institutions is to provide the right incentives. This is 
why USAID actively promotes the principles of rewarding performance 
rather than promises, rewarding good governance, establishing local 
ownership, civil society and private investor participation, and 
streamlining the assistance delivery process, all of which are 
reflected in the MCA.
    I want to highlight in particular the critical importance of 
governance. The emphasis on governance in the MCA reflects a 
fundamental lesson we have learned through hard experience; no amount 
of money from afar can compensate for or overcome corrupt local leaders 
or the absence of political will. Overcoming poverty and fostering 
growth requires governments to become more transparent, inclusive, 
lawful and responsible to their citizens. Money can't buy this 
commitment or these kinds of reforms. There needs to be the will to 
actually pursue these goals. These kinds of reforms, however, can be 
supported, encouraged and even reinforced by rewards for governments 
that are moving in this direction. Good performers should be tangibly 
rewarded with increased development assistance from the international 
community, incentives for foreign investment, and trade liberalization. 
Democratic, accountable governance with responsible economic policies 
should bring immediate and sustained benefits.
    But actually linking aid to development performance is a radical 
step. This is one of the reasons why MCA marks a revolution in foreign 
assistance. Because MCA countries and institutions will have 
demonstrated capacity to achieve results, the new Millennium Challenge 
Corporation (MCC) will be able to employ a new way of doing business 
that relies on host country institutions to manage development 
activities.
                         relationship to usaid
    The revolution does not stop with the MCA. It has just begun. The 
themes of the critical importance of governance and country ownership, 
the emphasis on performance and accountability, must infuse all of our 
development assistance. That is why, working under the inspired 
leadership of Secretary Powell, we initiated a series of reforms at 
USAID two years ago. We knew that the major changes of the past decades 
had dramatically altered the landscape for development and that we 
needed a new direction for U.S. foreign assistance, and hence produced 
the recent report, Foreign Aid in the National Interest. We took up the 
challenge of drawing these lessons together to begin to formulate the 
outline for a new framework for U.S. foreign assistance.
    We had already begun making some of the changes in USAID suggested 
by the report, incorporating lessons learned, such as making governance 
an essential crosscutting theme, and adopting strategic budgeting 
approaches as we reorient ourselves and adapt to the current 
challenges. USAID, however, is only one piece of the picture of USG 
foreign assistance. As you well know there are numerous U.S. 
departments and agencies--the State Department, the Treasury 
Department, the Department of Defense, the Peace Corps, to name only a 
few--that all have different roles and objectives in providing 
assistance. Putting these different pieces all together, many of them 
with very diverse mandates, is no small task. Indeed, the MCA is the 
cornerstone of putting America's foreign aid back in order: renewing 
the focus on economic growth, integrating the nation's foreign affairs 
expertise, and mobilizing new resources for development.
    This is why the MCA, which has boldly and forcefully articulated a 
new vision for development--with the resources to support it--has such 
a critical role to play in stimulating and focusing the debate on 
foreign assistance. Not only is it driving the debate in the United 
States, but it has also grabbed the attention of our international 
colleagues, who are all watching the progress of the MCA with great 
interest. It presents all of us who care about development with both a 
strong challenge and a historic opportunity. It gives us a clean slate 
to make the case to the American public and the international community 
that development is critical to global stability and that it can work.
    To those who have questioned whether USA]D feels threatened by the 
MCA, I would answer, to the contrary. We welcome the MCA as the 
strongest possible commitment by the Administration to making 
development a core element of our foreign policy. Not only does it 
embody the right philosophy and approach to development and potentially 
provide a model for development, but it also gives USAID the 
opportunity to claify its role and better focus its activities within 
the context of a coordinated U.S. development strategy.
    We view the MCA as our leading edge, targeted on spurring growth in 
the best performing poorest countries, providing the level of resources 
that can really make a difference in moving them to a higher growth 
trajectory. It will rely on country institutions--investors, business 
people, political leaders and civil society--to design and lead the 
economic growth of the country. But MCA, due to its strict criteria, 
will only assist a limited number of countries. That leaves the large 
majority of the developing world to USAID and other agencies and 
actors.
    Given our strong interest in supporting and complementing the 
Millennium Challenge Corporation, USAID has been reviewing its 
portfolio to determine the best way to organize itself both to support 
the mission and operations of the MCC and to fulfill our mandate to 
help a wider range of developing countries. In addition to providing 
support that may be needed in MCA countries, we believe that USAID 
should focus activities on four broad groups of countries: (1) 
countries that just miss getting into the MCA; (2) the mid-range 
performers with the will to reform; (3) failed or failing states that 
need post-conflict, transition or humanitarian assistance; and (4) 
countries requiring assistance for strategic national security 
interests.
    I would like to highlight our belief that the central objective of 
focusing on performance, particularly responsible governance, and 
focusing on good performers must infuse all our development efforts--
not just the MCA--and those of other bilateral and multilateral donors 
as well. This is the way that MCC can serve as a model for all of our 
assistance programs.
    In the first group of countries, USAID will concentrate on the 
specific areas needed to help a country become eligible for MCC funds. 
For example, if a country just missed on the investing in people area, 
USAID would concentrate its programs in that area to help it qualify 
for MCC funds in a future round. In the second group of countries which 
are unlikely MCA candidates in the near term, we will need to assess 
the commitment to political and economic reform.
    Where such a commitment exists, we will concentrate on building 
local capacity and institutions that can support the foundation of MCA 
assistance, i.e., ruling justly, promoting economic freedom, and 
investing in people. For those countries that lack such a commitment, 
we will continue programs that address global issues such as HIV/AIDS 
and environmental degradation, but will need to review broader 
development assistance. We are already beginning this process of 
applying an MCA lens to our country programs, informing resource 
decisions with analysis of democracy and sound governance.
    In the third group USAID has responsibility for countries and 
situations that do not lend themselves to assistance guided by MCC 
criteria, such as in failing, failed and conflict states. As the 
National Security Strategy states, ``America is now threatened less by 
conquering states than we are by failing ones.'' Fully two-thirds of 
the countries where USAID works have suffered violent conflicts within 
the last five years. We know that conflict is complex and that 
interventions must focus on multiple dimensions. We are actively 
developing new assistance models that will integrate emergency relief 
and food with transitional assistance, governance investments and civil 
society building. We must approach these states with targeted, flexible 
support that emphasizes conflict prevention and the nesting of short, 
medium and long-term issues in our program designs.
    Humanitarian assistance also remains central to USAID's portfolio. 
Originally designed to respond to natural disasters, humanitarian 
interventions are increasingly necessitated by complex emergencies 
caused by conflict, failed and failing states. We restructured our 
humanitarian assistance to create a new Bureau of Democracy, Conflict 
and Humanitarian Assistance to make sure that democracy and conflict 
are at the heart of our response to failing states, We have also 
increased our funding levels. Recognizing the need for greater 
flexibility in responding to humanitarian emergencies and failing 
states, the President requested a new contingency fund to facilitate 
the quick response that is critical in emergencies.
    Finally, USAID will continue to respond to needs in countries of 
strategic national importance or transnational threats recognizing that 
the primary objectives typically fall under national security and 
foreign policy more than development. These political challenges will 
continue to arise, frequently related to the war against terrorism. As 
much as possible they are funded out of Economic Support Funds (ESF) or 
other assistance. USAID will work quickly, flexibly, and effectively to 
achieve overall U.S. Government objectives.
    In addition to adapting our programs to support and complement the 
MCC, there are of course other ways that we will be working closely 
with the MCC. Foremost will be detailing staff to the Corporation. We 
view the long experience of USAID's development professionals as an 
invaluable asset to the new corporation. As I will outline below, we 
also envision that USAID support to the MCC in the field will be 
required, given the lean staffing currently envisioned.
    On the broadest policy and programmatic level, I expect to 
coordinate closely with the CEO of the MCC, given our complementary 
roles. This will be paralleled by coordination on a programmatic level. 
While some have questioned whether the establishment of the MCC doesn't 
complicate our development efforts, I would suggest that today's 
reality is already a complicated one. There are many actors involved in 
development. The addition of the MCC, which brings such significant and 
welcome new resources applied to the best development practices, has 
the opportunity to bring greater strategic focus to our entire 
development framework.
                             implementation
    Turning to the question of how the MCA will actually be implemented 
in the field, I need to preface my comments by saying that very few of 
the details have been worked out. However, I will try to lay out a very 
broad vision for you of how the MCC might work, subject to revision, 
once we get the Corporation up and running.
    MCA programs will be founded on a partnership and be very focused 
on one or two key strategic objectives that the country has identified 
as their top priority to stimulate growth. In order to develop a 
proposal, we are asking countries to engage in a consultative process 
with all the relevant civil society and private sector groups. One of 
the central principles of the MCA is that it be a transparent process 
from start to finish. This is why it is important that the initial 
phase of developing a country proposal set the tone and foundation for 
the development partnership. While the process may vary considerably 
from country to country, the themes of transparency and country 
leadership and ownership of the proposal are critical.
    In some cases, technical assistance may be required to help a 
country develop a proposal, which the MCC could offer. However, the 
country will be managing the process; it will not be a case of the MCC 
hiring consultants to develop a proposal it wants.
    If a country's proposal is selected, a country contract would be 
negotiated between the MCC and government. This does not imply that 
those funds will only go to the government. To the contrary, it is 
anticipated that MCC funds will go to a variety of national and 
community actors and alliances. However, the government will sign the 
agreement with the MCC and have overall responsibility for managing and 
overseeing the contract. The reason we chose a contract approach is to 
underscore that both parties have an obligation to meet the terms and 
conditions outlined in the contract.
    We anticipate that MCC funds will mobilize a variety of economic 
actors in each country; to the extent that a development result 
requires a public sector investment (schools or roads), funds would be 
channeled through the government. However since economic growth 
inevitably depends on the activities and investments of the private 
productive sectors, community groups and civil society organizations, 
we expect that these institutions would also participate, and even 
implement the bulk of the investments. In all cases, we expect that MCC 
funds would be disbursed directly to the institutions implementing 
activities under the MCC contract through the most flexible, but 
accountable mechanisms.
    If a country selected for MCC funding has a USAID mission and 
program, we would likely undertake a strategic review of the program. 
In many cases, we would see the USAID program transition to support the 
MCC contract. Some programs, such as those fighting HIV/AIDS or 
trafficking in persons, might well be continued, while others might 
logically be phased out or incorporated in the MCC program. Indeed, one 
of the ways that USAID will complement the MCC is that we have the 
ability to address regional issues, such as disease, water resources, 
transport linkages, etc., that the MCC, by virtue of being country-
specific, cannot.
    One of the basic premises for implementation of the MCC is that it 
should be demand-driven. We do not want to prescribe the mechanics of 
how activities would be implemented. I would anticipate that it will 
vary considerably from country to country, knowing there are no 
``cookie-cutter'' approaches that will work across the board. However, 
the goal will be to employ simple implementation mechanisms that 
require less oversight and less U.S. management than traditional 
projects. There are a variety of mechanisms for spending the funds, 
such as contracts or grants, but these could be managed by the host 
country, following their policies and procedures.
    Because the management approach of the MCC will be to employ local 
institutions for country development, it is appropriate that the MCC, 
too, rely heavily on strong local institutions for the in-country 
expertise it requires. Economic and financial analysis of specific MCC 
investments can be contracted locally. Technical advisory services to 
the MCC can be contracted locally. Monitoring and evaluation can 
largely be contracted locally. Therefore, we anticipate that the full-
time presence of U.S. government employees needed to manage the MCC can 
be significantly reduced.
    Even though we envision a strong reliance on local institutions, 
there will still be a need for limited MCC staff presence in the field 
to facilitate, manage and oversee the partnership. Due to the limited 
staffing, we anticipate that the Ambassador and Embassy staff will play 
a strong supportive role of the MCC. We also believe that USAID field 
staff, with its development expertise and knowledge of local culture 
and context, will play a key role in supporting the MCC.
    USAID presence in the field has rightly been repeatedly recognized 
as its strongest suit. Thirty years of development experience has 
taught us that country context matters a great deal. I can imagine that 
our very capable field Missions could provide critical support to the 
MCC, helping to work with local partners, finding creative, local 
solutions to problems, and generally facilitating the work of the MCC. 
The basic USAID activity in many of the likely MCA countries has been 
knowledge transfer and building local capacity and institutions. In 
some cases, continued USAID programs in institution building may be 
necessary for a time to further build country capacity to manage MCC 
programs and resources. As I have tried to emphasize, while I believe 
USAID will have a key role in supporting MCC programs, we do not want 
to adopt a black or white approach to how USAID will relate to the MCC 
in every country; rather we think each country will need to be reviewed 
on a case-by-case basis.
                               conclusion
    As I mentioned earlier, there are many practical details to be 
worked out, which the CEO and MCC need to be involved in and will be 
best equipped to solve. However, I think we have developed a strong 
vision of key principles for the MCC. I began by saving that we believe 
the MCC marks a revolution in the U.S. approach to development 
assistance. It will help clarify the mission and objectives of foreign 
assistance, it will provide greater policy coherence by integrating 
foreign policy expertise, and it will mobilize more resources to help 
make development truly sustainable.
    Spurred by the proposal for the MCC and the changes in the 
developing world, we are forging a better understanding of foreign 
assistance and its numerous different goals--the developmental goals, 
the humanitarian goals, the policy goals, trade-related goals, security 
goals, etc. We are beginning a process of articulating these goals and 
matching them with appropriate resources and programs, and developing a 
strategic approach to U.S. foreign assistance.
    For USAID, the MCC has the potential to provide a great model. It 
is a golden opportunity to prove that development, done right, can 
work. I urge your favorable consideration of the legislation and look 
forward to working with you in the weeks ahead.

    The Chairman. We will have a first round with 7-minute 
limits on Senators, and, if necessary, we will have a second 
round as we question this panel.
    Let me start by saying that my understanding is that the 
countries under consideration for the new MCA program would 
have a per capita income below $1,435, as well as the ability 
to borrow from the World Bank International Development 
Association. There are 74 countries apparently in this 
category.
    But the criteria you have suggested, the 16, have led the 
Center for Global Development to estimate that only 13 
countries would qualify in the first year. Now, that does not 
negate the value of the 16 criteria. It may be the purpose of 
the program to elevate the conduct of governments and their 
policies very abruptly, so that conceivably there might be just 
five winners.
    But I just want to make sure my own understanding is yours, 
and that is the criteria appear to be substantial, even 
reasonable to Americans that other countries ought to have 
these humane and efficient policies that you have suggested, 
but most do not. In fact, a huge number do not, and especially 
among those countries that have fairly low per capita income.
    Now, in answering that question, try to couple it with 
this. It is suggested, as I understand the MCA program, that by 
the third year, the income cap would rise to $2,975. And some 
have suggested--and you have all done the math on this--that 
the increased cap might qualify more countries, such as Egypt, 
Russia, Colombia.
    If that is the case, then some very large entities may 
become a part of this, well beyond the small countries that are 
envisioned at least in the first track and the first year with 
perhaps substantially different policies of management. 
However, as Mr. Natsios has said, USAID will be integrating 
case by case, trying to think through what is already 
occurring, or if we are doing anything in these countries.
    I wonder about the philosophy, please explain to us the 
thinking and then likewise, the very small staff. You have 
talked about a lean organization, and it certainly is. But will 
MCA have people in the field? How will they deal with the NGOs 
and with others who are intersecting so that life does not 
become very complex for the recipient governments contending 
with the various parties that are now all interrelating with 
each other.
    Secretary Larson, would you have a crack at those questions 
to begin with?
    Mr. Larson. Thank you, Mr. Chairman. I will certainly give 
you an overview of our thinking. First of all, while it was 
premature to talk about any list of countries as such, because 
we do not have the latest data on these indicators and we will 
be running all of that later, I think it is correct to expect 
that the rigorous application of these indicators and criteria 
will result in a very selective program.
    And we believe that is appropriate for a variety of 
reasons. First of all, the experience in development over the 
last 50 years has shown that we get much greater developmental 
impact, more bang for the buck, more kids completing primary 
school, for example, if we are investing our development 
assistance resources in countries with good policies.
    Second, we do believe that as Andrew Natsios said that in 
countries that do not make the cut in the first instance, this 
set of very open and transparent criteria is already spurring 
ferment and change and pressures to improve policies in 
countries where those policies need improvement. And that is 
one of the very important goals of the Millennium Challenge 
Account.
    We are going to make sure that we are in a position to help 
those countries that are trying to improve their policies and, 
again, Mr. Natsios has outlined the ideas USAID has for lending 
a helping hand to countries that are not quite where they need 
to be at.
    In later years of the Millennium Challenge Account, we do 
imagine easing the per capita income level to something just 
below $3,000 per capita, which includes what the World Bank 
calls the low-, medium-income countries. But there is a couple 
of points to bear in mind here.
    First of all, these are still countries that have very 
serious problems of development and poverty, particularly for 
certain segments of their population. Second, we do not imagine 
these countries competing against the poorest countries. Our 
vision is that they would compete among themselves for a slice 
of MCA resources.
    We believe that the focus of this program has to remain on 
promoting development and economic growth in the world's 
poorest countries, and that is where we intend to keep it.
    Last, on the size of the Millennium Challenge staff, you 
are right in saying it is a lean staff. We want to work very 
hard to avoid a new bureaucratic entity. We are talking about 
short-term appointments. We believe that they may need to have 
a limited field presence, but we would also expect that in 
countries where USAID is present that USAID would certainly 
help and certainly the U.S. Embassies would help in every 
country where the MCA is operating.
    The Chairman. So you intend to rely upon that structure?
    Mr. Larson. Yes, not necessarily exclusively, but to rely 
on it very heavily.
    The Chairman. And your staff sets the criteria, tries to 
gather the data, makes the decision as to who the winners are, 
and proceeds that way. And that is what the 100 people do?
    Mr. Larson. That is what the 100 people do. And they will 
make proposals to the board.
    We have made clear that because any indicator is imperfect 
and because you cannot summon an indicator to a hearing to 
explain why the government is giving money to a particular 
country, it is important for the board to exercise judgment 
that can take into account missing or lag data or other factors 
that may not be captured by that indicator about whether we 
truly are selecting countries that are governing justly, that 
are committed to the investment in their own people, and are 
promoting economic freedom in their own countries.
    The Chairman. Well, the indicators, I think, are great, but 
they have a highly qualitative content; for example, as you 
discuss, corruption First of all, you collect, I suppose, 
stories of corruption or lack of it. To what extent does this 
affect American diplomacy? Is it much like the accounts, at 
least of those who have drug problems? Each year we wrestle 
with whether they have a high degree of corruption, a low 
degree, whether there should be waivers. In other words, have 
you thought through the public relations aspect of listing out 
the foibles as well the strengths of each of these 74 
countries?
    Mr. Larson. Well, I think we have. And we think while there 
will be difficulties, that there is great merit and openness 
and transparency. And I know each of us at this table believes 
that corruption is a cancer that makes development almost 
impossible.
    And both through our initiatives in the international 
financial institutions, through technical assistance through 
USAID and through initiatives like the OECD Anti-bribery 
Convention, we all are trying to push the envelope for greater 
transparency and greater anti-corruption initiatives.
    The Chairman. Senator Hagel.
    Senator Hagel. Mr. Chairman, thank you. And I welcome our 
witnesses. Thank you for your appearance this morning. This is 
an exciting proposal and I compliment the President and all of 
you for developing it.
    And I think there is little question, as the three of you 
have expressed so well this morning, as has the chairman, the 
importance of this kind of attention and focus and the 
resources that must go with it as to the future of our 
security, if nothing else, American security, our role in the 
world. It is an investment in stability and security.
    And I think we should see it that way as well as the 
humanitarian, because it will be those tools--the humanitarian 
and the economic and the trade and environmental, law 
enforcement, intelligence that I believe coming together in a 
seamless network of our allies will do as much to secure the 
security of this country for the future than our military will. 
All must be used and will be employed.
    So this is very important, what you are doing, and, again, 
thank you for focusing on this.
    Secretary Taylor, describe for me the role of Treasury in 
here. In your testimony, you have laid out the 16 points but 
what will be your role here on the board? What expertise do you 
bring to this effort?
    Mr. Taylor. Senator, as you know, the Secretary of the 
Treasury would be a member of the board as currently proposed. 
And the role of Treasury here, I think, is most important in 
the focus on the policies that will raise economic growth, and 
looking at those policies, working with the countries about 
those policies as we frequently do, whether it is through the 
international financial institutions or in bilateral ways.
    I think another role which is important, which we all share 
in the government, is measuring the results of the projects--of 
the specific projects and contributing to that as well.
    So it is these economic financial quantitative aspects that 
I think are so important in this project in which the Treasury 
has participated in already in developing and helping to 
develop the indicators, working with other agencies, State, 
OMB, USAID. So those are the particular things that the 
Secretary would focus on.
    Senator Hagel. Thank you. I know there is no one here who 
can speak for OMB, but can anyone explain to me what OMB's role 
would be? If that is Treasury's role, then what is OMB'S role?
    Mr. Larson. I think there is two things that I would 
highlight, Senator Hagel. The first is that when fully 
implemented, this represents a 50 percent increase in the 
Nation's commitment to development assistance.
    And I think the Director of OMB is the place where you have 
to really look to get advice about whether we are getting the 
results we want for that substantial investment.
    Second, I think OMB, as the agency within the government 
that really focuses on management and management by objective 
that the Director would be in a position to support what the 
Secretary of the Treasury would be doing and helping formulate 
this measurement of results in making sure that your meeting 
benchmarks in these programs.
    Senator Hagel. But is that not already the role of OMB? Do 
you not all have to go to OMB to get your budgets approved, and 
do you not have to go through that process if there is an 
appeal?
    I mean, I am not sure what new assistance or authority you 
are adding here. Since they already have that.
    Mr. Larson. In many respects it replicates what is the 
Budget Review Board right now. And I think that is seen as one 
of the merits that you have right on the board, the key players 
that would be reviewing resource allocation decisions within 
the administration, if there was a difference of opinion about 
whether a particular investment or budget allocation should be 
made.
    You have got that represented right on the board of 
directors.
    Senator Hagel. Administrator Natsios, you wanted to 
respond.
    Mr. Natsios. Let me just add one little caveat--not caveat, 
but sort of an argument here that I do not think is fully 
understood. There has been a shift in the last 12 years in 
terms of foreign assistance.
    When I left the first Bush administration, most foreign 
assistance was done through USAID. And in the nineties as the 
cold war ended, the perception was that most Federal 
departments should have international programs. Some of them 
appropriately, some of them, it was a little more difficult to 
defend, but they have them anyway. And so many Federal 
departments are involved appropriately in foreign assistance 
now, and they have technical expertise in it.
    If we have this MCA and we do not have a disciplining force 
on the board that can force other Federal departments over the 
longer term--this has nothing to do with one administration or 
another--to have one coherent development strategy, we could 
have MCA and USAID doing one thing with State and Treasury, and 
then other Federal departments basically doing whatever they 
want to, which could contradict what the MCA does.
    Senator Hagel. You are not saying that that is the case now 
with the Federal programs?
    Mr. Natsios. No. I am not saying it, but we----
    Senator Hagel. So we should have OMB maybe on all these?
    Mr. Natsios. No. But I am saying by having them on the 
board of this MCA, what they are doing is allowing a level of 
inter-agency discipline.
    It used to be OMB that was the disciplinary force during 
the cold war to ensure there was coherence in strategy. And by 
being on this new board, I think they are going to be in a much 
more powerful position to ensure in the future that there is 
strategic coherence.
    Senator Hagel. Are you aware that OMB was invited to 
testify and declined to testify? Did the three of you know 
that? You knew that.
    Why would they decline to testify if they will be one of 
the three board members? Do you have any idea?
    Mr. Natsios. I do not know.
    Senator Hagel. We will ask them.
    Mr. Natsios. You will ask them, yes.
    Senator Hagel. Of course, I know you cannot speak for them. 
But I find it interesting that if they are one of the three 
board members, they were asked to come up and testify and they 
declined.
    We will ask that--Mr. Chairman, I would like to ask that 
for the OMB Director, because if they are to play this very 
important and critical role in protecting the American taxpayer 
then it seems to me they have an opportunity and some 
responsibility to come up and explain that, and maybe we can 
have another hearing for them to come up.
    I have other questions, and I will wait till the second 
round. Thank you very much, gentleman.
    The Chairman. Well, thank you, Senator Hagel.
    Senator Chafee.
    Senator Chafee. Thank you very much, Mr. Chairman.
    Senator DeWine and I just got back from Guyana and Haiti 
over the recess, the recent recess. And we were looking at some 
of the programs that USAID does have as we look at the funding 
for HIV and AIDS funding coming up.
    And I was very impressed with the work being done in these 
countries of extreme hopelessness and great challenges. And the 
reflection that it has on us as Americans to see this American 
program out there in such hard to travel conditions making a 
difference makes me wonder what are the frustrations, Mr. 
Natsios, with the current USAID program, specifically where are 
the frustrations that caused you to want to make these changes?
    Mr. Natsios. Thank you, Senator. I am glad you saw two very 
good programs. I just, in fact, this week met with the 
President of Guyana, and we discussed the very programs that 
you saw.
    Well, there are several frustrations. One is we have some 
very experienced people who work in the Foreign Service in 
USAID who have been career officers for a long time, and who 
have worked in the developing world all over the world. The 
level of detail in the appropriation bill each year in terms of 
what we will spend, where we will spend it--I do not mean in 
broad categories--is enormous. I mean, you will approve this 
grant in this country under these circumstances. And it is not 
a few. It is hundreds of earmarks and requirements. And none of 
it is malicious. It is very well intentioned, but the effect is 
to put a huge straitjacket on our people in the field.
    I have officers in countries that will say, ``We need to 
spend more money on democracy and governance in this country. 
That is the critical problem.'' And we have no democracy money, 
because it does not have a constituency in Washington or in the 
United States that is very clear.
    Or another country, a very well governed country, needs 
help in agriculture; for example, and there is not enough money 
for agriculture. So the thing the MCA does is to say there are 
to be no--the President is very clear on this--no earmarks.
    The money is going to be programmed within the countries, 
since they are functioning democracies, using civil society and 
the parliament and the media and the executive branch. They 
will make the decisions locally and allocate the resources 
based on their needs rather than our requirements in terms of 
sectors and our constituencies in the United States.
    So I think that a major problem for us and a major 
frustration for our officers is the lack of flexibility in the 
existing structure. This has built up over many, many years. I 
understand why it exists the way it does, but ultimately the 
decisions of this kind, I think, should be made in a 
decentralized way.
    Senator Chafee. As Senator Lugar said and as Mr. Larson 
said, this is going to be a very selective program. Does that 
not concern you that--from my recent experience--the good will 
that is generated by having these American programs out there 
and the reflection on us as a country at this critical time 
when we need it most. To pull our parameters in so tightly 
seems like we are going backward.
    Mr. Larson. If I could comment briefly on that, Senator. We 
believe it is very, very important for the MCA not to come at 
the expense of either USAID as an institution or the other 
programs that you have already mentioned.
    For example, the President on HIV/AIDS has called for a 
dramatic expansion of this over the next 5 years, proposing $10 
billion of new money, most of which would be, I expect, 
administered through USAID and go to countries based on where 
this disease is the most serious and where our money is most 
badly needed.
    We are proposing to increase our commitment on things like 
fighting famine and emergency relief. So we intend to be 
present in countries where there is a need and where there is 
an adequate commitment to reform. But we do also believe that 
this new program, which involves a very, very substantial 
increase in resources, should be focused in those places where 
you know you can get the best developmental outcome for every 
dollar you spend.
    And by doing that, we think we can foster greater economic 
reform. We believe that there will be strong support from the 
American people and the Congress for these types of 
initiatives, because they will see the results that we are 
producing.
    Senator Chafee. Mr. Natsios, I will also ask in my limited 
time remaining, your agency will not be on the board, is that 
correct? And, obviously, the question must be someone that is--
an agency that is so experienced in this area, and all the 
challenges that come with it--we recognize the challenges for 
trying to make every dollar stretch as far as it can, but all 
the experience it has to not be on the board is--to me, is 
perplexing what is the answer?
    Mr. Natsios. Well, first, I just want to say, we support 
the legislation as it is written. We have a representative on 
the board. His name is Colin Powell. He is the Secretary of 
State. He is my boss. I am at the Deputy Secretary's level. I 
am not equivalent to the Cabinet Secretary, and that is who are 
on the board, people of that rank.
    So, why have two people from the foreign policy apparatus? 
We have our representative. He is the Secretary of State on the 
board.
    If I could tell a quick story, though, on the last 
question? We had the speaker of the parliament of a country--I 
will not embarrass the country, which has a corruption problem 
but does well in all the other indicators. He came in and he 
said, ``Well, we want to be eligible for the MCA.''
    I said, ``Well, I am afraid you are not going to be, 
because there are four pieces of legislation that have been 
languishing in your parliament for 3 years now that you refuse 
to pass to clean up this corruption problem. And I am very 
sorry, but you are probably not going to be eligible.''
    He did not say anything. I asked our Mission Director 
yesterday what effect did that have. He said it has caused 
convulsions in the capital.
    They went to see the President. They said, ``you know, we 
could not be eligible for this just because we did not get this 
legislation through and we are not implementing it. And that is 
a lot of money that we are going to lose.''
    So they are actually now for the first time in 3 years 
taking this seriously. Because it is such a large amount of 
money and the incentive is so big, it is changing countries 
that might not be eligible. That helps us in the existing USAID 
program in a country, because our biggest impediment to doing 
development in that country is the corruption problem. And they 
are now facing it, because they realize it has done damage to 
them for their eligibility.
    Senator Chaffee. It appears the parameters are still tight 
for that. Thank you.
    The Chairman. Thank you very much, Senator Chafee.
    Senator Brownback.
    Senator Brownback. Thank you, Mr. Chairman.
    Gentlemen, thank you for coming here and, Mr. Chairman, 
thank you for holding the hearing.
    I want to compliment the administration on this Millennium 
Challenge Account and Millennium Challenge Corporation.
    With Senator Moynihan, we were talking about an issue that 
both of us were trying to grapple with. And he noted in all his 
experience here that until you figure out how to measure 
something, you can rarely figure out how to change it. And that 
seems to me to be really square-on with what we have in our 
history of development aid funding and where we are today.
    We have done a lot of development aid funding, and we have 
done it out of--really trying to think we are doing things out 
of the goodness of our heart, it is the right thing to do. We 
want to help people. Those are the right instincts, the right 
way to go at it. But we need to continue to figure out how to 
measure it, or you rarely are going to be able to figure out if 
we have really been successful with this or not.
    Consequently when you go across the country, a lot of 
people are not very supportive of development aid funding. They 
think it is a much larger portion of the budget than it is.
    I generally have people say, when I ask a group, ``How big 
do you think the developmental funding aid is, foreign aid?'' 
generally ``Around 25 percent'' is the usual figure that I get.
    And when I say 1 percent, then I have lost credibility with 
the audience, because they do not think that can be true, that 
it is at that level.
    But I think a big portion of it is they are good-hearted 
people. They want to support and do things right to help 
others, but they just--the history has been very checkered of 
success and failure and how it has been given to people. And on 
what basis has it been passed to others? Is it based on some 
sort of political relationship between the President of that 
country and the President of this country, and that kind of 
thing. Is there some greater issue that is involved and the 
money is wasted? And there is a view of a strong amount of 
waste.
    That is why I really compliment you on this program. It is 
measurable. It is definable. And it bases it on accomplishments 
that are there and not on any sort of basic political 
relationship.
    The premise I would hope you would look at this in the 
future that, if we get this established, as pouring other funds 
into it. And I think, Mr. Natsios, you were suggesting that we 
have got a lot of different agencies that have international 
funds now. I would hope that more funds could be attracted to 
this sort of criteria-based allocation. And not all and each 
country is in a different setting than what--than another one 
is, and I would like a group discussion too.
    I worked in Central Asia for some period of time, and 
clearly that region needs to work together and collectively to 
expand its economic opportunities, expand its trade, expand the 
east/west corridor, oil movement. And there are huge synergies 
for them if we can encourage them to work together.
    But I would urge you--and I do not know if there is any 
thoughts about this, about drawing more of the foreign aid 
budget into this sort of criteria based allocation rather than 
just starting a new account and it being another foreign aid 
account, rather than one that really helps reform the system 
or--I do not know if anybody would care to----
    Mr. Natsios. Let me just speak about our budget in USAID. 
We are actually going through a very substantial review of the 
way in which we do our business to use the MCA model and 
criteria as a way of restructuring USAID internally.
    And if you look at the longer testimony for the record, it 
goes into some detail as to how we are doing that. We have done 
a lot of work on it, and I have to say there is wide acceptance 
within the agency that this is the opportunity to change what 
we know does not work for a model that career people and others 
are very enthusiastic about.
    We believe the President was right on in what he said; and 
not just because he is our boss, but because based on the 
empirical research, which is initially what it was based on, he 
is exactly correct.
    So we are looking at the existing portfolio in a detailed 
way in determining which countries fall in which category. A 
failed or failing State like Sudan or Somalia, which has not 
had a government in 10 years, for example, is not going to be 
eligible for MCA, and we cannot provide assistance to them 
based on this model.
    We are not going to provide assistance to HIV/AIDS based on 
whether the government reforms or not because it is an epidemic 
that crosses national boundaries. So there are nuances in this 
that we need to make sure get worked into the language we 
structure in the existing program.
    Your point is very well taken. You are exactly correct and 
we are trying to do that now.
    Mr. Taylor. Senator, I just want to add to that with 
respect to the foreign aid that goes to the international 
financial institutions, for example, the World Bank's funding 
for the poorest country item, we are also trying to emphasize 
the same features in those programs as well.
    For example, the most recent replenishment item has a very 
specific measurable results component to it. And in the 
authorization we are requesting, there will be an incentive 
built into the World Bank to explicitly measure the 
accomplishments of their programs in much the same way that we 
are focusing here in the Millennium Challenge Account. And 
there is also an emphasis on allocating the funds based on 
policy performance.
    So in some sense the MCA is incorporating the features that 
are so important and the President has emphasized, but we are 
trying to have those same features apply to other parts of our 
foreign aid as well.
    Senator Brownback. Good. Good.
    Mr. Chairman, I would just note that, finally, on this that 
we generally have done many things in our involvement based 
upon vital and strategic interests of the United States. And I 
think that measure has generally served us well.
    But I think in looking to the future, vital and strategic 
is going to include more functions with it, and this is one of 
the functions of expanding democracy, of getting systems right. 
Systems of government really matter. Just compare North and 
South Korea if you want to get a real drastic example of that. 
One is the 12th largest economy in the world; and in the other, 
a third of its people are living on food aid donations. The 
systems hugely matter in the world.
    I would hope that as we move forward, the overarching views 
for foreign policy that are not vital and strategic, we look at 
how we do our compassion and how we present that in a way that 
can be most empowering to the people. And that is why this 
account in the way it measures and is set up is really good.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Brownback.
    Normally, I would recognize a Senator from the other side 
of the aisle. But I am going to ask permission of Senator 
Feingold, if I may, if I could recognize Senator Sununu who has 
been here for a portion of the hearing, and then I will 
recognize the Senator from Wisconsin.
    Senator Sununu.
    Senator Sununu. Thank you very much, Mr. Chairman.
    There has been a little bit of discussion today and in 
terms of the materials we have had about the cases, and the 
role of the four, and trying to differentiate between those 
cases.
    I am a little bit concerned. Maybe I am looking too far 
out. But I am a little bit concerned about a problem that may 
arise, and that is whether or not you fund all of the countries 
that may be eligible. And it is certainly the possibility--and 
I would suggest the hope--that we might have 60, 70, 80, 90 
countries available if you look at the different income 
determinants, those that will be eligible. And certainly over 
100 countries are potentially eligible as the program is now 
structured.
    My question is whether your goal is to get off a good 
system that can choose among qualified countries, or if the 
goal is ultimately in the near term to fund any country that 
qualifies. Mr. Larson.
    Mr. Larson. First of all, we do think, at the very 
beginning, Senator, this is going to be very selective. And we 
expect that the number of countries that we will prove to have 
been above average in the, you know, in at least half of these 
various indicators will be a relatively small number. But even 
then, we----
    Senator Sununu. I am sorry. I have got to interrupt you. 
This may sound a little bit picky, but my guess is that, again, 
the pool is around 115 countries. Roughly one-half will be 
above average.
    Mr. Larson. Well----
    Senator Sununu. And so I do not have--I do not think that 
should be the metric within the pool of selecting those 
countries that are above average in the pool. I do not think 
that is what you meant. I do----
    Mr. Larson. I do not, but----
    Senator Sununu. I will give you a chance to be clear.
    Mr. Larson. No. What I want--when Mr. Taylor outlined this, 
he said you would have to be above average in a number of 
different areas.
    Senator Sununu. Right, but----
    Mr. Larson. By the time you do that, you start winnowing 
out countries because they may be doing fairly well in one 
segment, but then they fall down in others. So that is how the 
selectivity tends to operate.
    But even then, we do not believe getting into the eligible 
pool makes this an entitlement. Countries have to come forward 
with proposals that reflect their development goals and 
aspirations. But they also have to be proposals that we believe 
in and are credible, because we are their partners and we are 
putting our tax dollars to work there.
    As this program continues, we do believe also that 
countries that are participating with us as partners should do 
so with the expectation that we are supporting a specific 
activity that does have a beginning and an end. We want these 
projects or activities to be sustainable after a few years of 
U.S. support, because we are not thinking about having an 
indefinitely long funding relationship for a particular 
activity in a particular country.
    We want to emphasize the idea of self-reliance, having this 
be a kick start, but not something that just continues year 
after year with the same country, the same activity.
    Thank you.
    Senator Sununu. There seems to be a slight contradiction 
here, which is to say that you are setting up a challenge 
account where you say, ``'If you meet specific criteria in 16 
different categories, you become eligible for support.''` And 
by structuring a program with such incentives, then you should 
be encouraging everyone that is eligible to do certain things.
    But then you are also saying another hurdle, once they 
become eligible--you were talking about project-specific 
assistance once they become eligible. Does not the existence of 
that additional hurdle in some ways discourage countries from--
or reduce the incentive for countries to meet all of these 
criteria if the possibility is there that even having met all 
the criteria, they are not going to receive any benefit from 
it?
    Mr. Larson. I do not think so in practice, for a couple of 
reasons. First of all, the amount of money that potentially is 
available is very fine. Second, we are prepared to work with 
these countries to develop activities and proposals that are 
consistent with their developing priorities, but also are ones 
that we believe are credible, that have the built-in benchmarks 
that we talked about and that we believe that the Secretary of 
State and the board can come before you and say, ``We believe 
this is a good use of taxpayer money.''
    We think this sort of posture, vis-a-vis our partners, will 
mean that there will be good activities that promote their 
development and that the board and that you will support.
    Senator Sununu. It seems that that, in the end, is an 
affirmative answer to the question, ``Are we going to 
differentiate among countries that meet all of the 
requirements?'' Is that correct? So you envision even if there 
are multiple, 60, 70, 80 countries, 100 countries that meet the 
requirements, the goal is still to pick and choose among them 
based on the strength of programs or how they----
    Mr. Larson. If we have that many countries that qualify, we 
already will have had very significant success in promoting the 
sort of policy reforms that will help countries develop at 
their own speed. But, yes, I think the board--I know that 
Secretary Powell believes that the accountability aspects of 
this are very important. He believes he will be accountable to 
the President, accountable to the committee, accountable to the 
Congress for how these resources are used.
    And so it has to be for projects that we--and activities 
that we think will produce the sort of results the American 
people expect. We think we will have gotten off to a very good 
start by ensuring that in the first instance we are working 
with countries that have crossed these policy hurdles and have 
shown that they are committed to good economic policy. But that 
is not the end of the process.
    Senator Sununu. At what point are countries no longer 
eligible for assistance? Are you just going to--is there a per 
capita income window for the middle income countries? Do you 
just hold that per capita income level and when a country gets, 
you know, $2,500 per year per capita, they are no longer 
eligible?
    Mr. Larson. We certainly see the per capita income level as 
something that would graduate a country from eligibility. We 
also intend to support a specific activity that is proposed by 
the country and agreed by us, and perhaps lasts for a couple of 
years. When that activity has been successfully completed, they 
would be graduated from that activity.
    Now, they may come back with a very good suggestion about 
something in another field. And if it is a good proposal and 
their track record was good on the first activity and they are 
still eligible to participate in the program, that is something 
we could consider.
    Senator Sununu. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Sununu.
    I have consulted with the senior ranking member, and he has 
asked to continue with our plan to recognize Senator Feingold, 
which I will do. Then I will recognize the senior ranking 
member, and then Senator Alexander.
    Senator Feingold.
    Senator Feingold. I thank the chairman and ranking member 
very much.
    Let me just thank you and followup a bit on what Senator 
Sununu was just discussing. Have you actually done a test run 
with these indices that you discussed? What was the turnout? 
What were the results?
    Mr. Larson. We have done a number of test runs during the 
last year of review. And we are continuing to get better data 
and more updated data. And I think we will, if and when the 
Congress approves this approach, we will do a run or a 
competition based on the latest data that we have.
    But the illustrative results that we have produced have 
suggested exactly what the chairman said at the beginning, that 
it tends to produce a group of roughly a dozen, could be a few 
more, could be a few less, countries that meet the indicators. 
That, of course, does not take into account the operation and 
the function of the board to make a responsible judgment about 
whether the indicators are really telling the whole story.
    Senator Feingold. Is there a way to get more specific 
preliminary results from this, that our committee could get so 
we could get a sense of what problems there may be? You are 
asking us to authorize this, and I am wondering if we could get 
a little more information about those, and about what you have 
come up with so far, subsequently.
    Mr. Larson. I think we will be prepared to work very 
intensively with the committee, Senator. Just to show you how 
these indicators work to--I mean, one of the things that is 
notable about this is that it is the most transparent process 
for considering foreign assistance allocation that I have been 
familiar with.
    We have outlined the indicators. They are available on the 
Web. They are publicly available, and so there is no problem in 
getting a very good sense about what we are looking at. And we 
will be prepared to intensify that discussion with you 
subsequently.
    Senator Feingold. All right. We will followup with you on 
that.
    The draft MCA legislation proposed by this administration 
does not spell out eligibility criteria in detail. And I do 
respect the need for flexibility, especially in a new 
initiative.
    But if we are going to commit taxpayer's dollars to this 
program, I am a little concerned about the potential 
rejiggering of criteria down the road to improve the 
eligibility of, let us say, a political favorite or shut out a 
good performer that might, let us say, differ on a vote with 
the United States on a controversial matter before the Security 
Council----
    Senator Feingold. Is it not possible to get a little more 
specific in a legislative format with regard to these criteria 
and still meet the administration's need for flexibility and 
enforceability and that kind of thing as was suggested?
    Mr. Larson. I think we have to strike a very thoughtful 
balance on this issue. We have done something that I believe is 
unprecedented in spelling out the amount of detail we have, the 
sort of indicators that we think ought to inform the judgment 
of the board.
    We have also said not only are those indicators publicly 
available, but that the decisions of the board will be publicly 
available. And the contracts that our government signs with 
another government will be publicly available. So the degree of 
transparency that we are envisioning in this program is 
something that is absolutely unprecedented.
    At the same time, none of us--or each of us, with the first 
two, admit that these indicators or any indicators are 
imperfect in certain respects. In some cases, there is not data 
available for all countries. In some cases, they do not capture 
everything you want to know about good governance or about 
investing in people or about the entrepreneurial climate that 
countries have or do not have.
    And for that reason, I know that the Secretary of State 
believes, while respecting the developmental goals of this 
program and feeling very strongly that this is a developmental 
program and not a program to accomplish other national 
objectives, that he and the board have to be accountable for 
the decisions that we make about where this money goes, and 
that they cannot say, ``Well, we do not think actually country 
x was such a good investment,'' but the indicators pop them up 
into the group. The Secretary is very, very clear on this. He 
wants us to be developmental. He wants the process to be 
informed by the indicators, but he also believes that he is 
accountable to you, not the indicators.
    Senator Feingold. All right. I hope we can work together 
and consider the possibilities and legislative language that 
would clarify these criteria and, at the same time, not destroy 
the needed flexibility. And I hope we can work together on 
that.
    Would you tell me a bit more about the graduation concept 
associated with the MCA? Is it just a function of the length of 
the contract, or is it linked to some objective set of 
indicators?
    Mr. Larson. Very briefly, we believe that an eligible 
country would come to us and say, for example, ``We think that 
our biggest developmental challenge is--the thing that will get 
us over the hump is''--let us say it is primary school 
education. And we know that the United States is not going to 
fund primary school education in that country for the long 
term, but we need to develop with them a specific set of 
initiatives. Let us say it is teacher training, textbook and 
curriculum development, and a certain set of very specific 
activities that they think over a period of 3 or 4 years will 
help them reach a new threshold of activity.
    We would want to build into that project the benchmarks 
that show whether they were on track and the sustainability 
assessment that shows that if a project is successful over, 
say, 4 years that they can carry it forward from then on in, 
and they would have graduated from that project.
    As I said in response to Senator Sununu's questions, that 
does not necessarily mean that they could not come back if they 
were otherwise still eligible and say, ``OK. We have a very 
important set of developmental objectives in the area of 
agriculture, and we would like to see if we could develop a 
similar project there.'' We do not rule followup contracts in. 
We do not rule them out.
    Senator Feingold. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Feingold.
    Senator Biden.
    Senator Biden. Thank you very much. My absence was not for 
lack of interest. Secretary Ridge and Attorney General Ashcroft 
and the Director of the FBI are before my other committee 
downstairs. So I apologize, Mr. Chairman, for being late.
    I wanted to followup on the question that Senator Feingold 
asked about the test runs. It would seem to me that that would 
be a fairly significant indices of how this is likely to work. 
My staff informs me that--in my request to them, they--and they 
then have asked about this, what some of these results are. I 
am not particularly looking for, you know, the names of 
countries who have crossed the threshold.
    I want to get a sense from you all of whether or not there 
is reason to believe that as we move in this direction in light 
of the fact that we talked about in this committee, in the 
previous several years under the former chairman, of 
reorganizing this whole account, if you will, under the aegis 
of 8,000 people in the Ministering and Aid Center, and this 
massive reorganization, which we--massive, or significant 
reorganization of the State Department.
    So can you give us some more insight without telling us 
what, you know--which countries cross the threshold? I mean, 
what should we, who are trying to support what you are talking 
about here--I mean, I do not think any of us disagree that 
study after study for the past 15 to 20 years shows that our 
aid is--its efficacy is in direct proportion to the fertile 
ground upon which it falls, whether or not it is used for 
social purposes, whether there is an infrastructure to 
distribute and so on and so forth. We all agree on that, and so 
we are on the same page.
    And Mr. Natsios knows a lot about this. He has been one of 
the people who have talked about this in the past prior to this 
present incarnation and this present responsibility. But it 
seems to me that the very committee you are asking for the 
reauthorization or the authorization to move in this direction 
should get some sense of what you are--of what the runs have 
indicated. What do you anticipate?
    This is not a, you know, you get a ``Get Out of Jail Free'' 
card in this room. I mean, if it does not turn out exactly like 
you think, that is OK; we understand. But can you give us a 
greater sense of what, if you were a betting man, based on the 
runs, what you--what we would look forward to in terms of 
countries that would be able to be recipients that would be 
able to, once this is up and running, that would have the more 
efficacious use of our limited resources?
    Mr. Larson. Thank you, Senator. I appreciate the way that 
you phrased your question because we, frankly, have been 
concerned that if the administration started publishing lists 
at this stage, at a point when we do not have what will be the 
latest data, we are going to start raising expectations, 
perhaps, for countries that are----
    Senator Biden. And I would suggest, Mr. Chairman, that 
maybe you consider--I would propose for your consideration that 
this study and list be submitted to us in a classified forum. 
It does not have to be in this public forum. But It would be 
helpful to us.
    But in an open forum, if you could give us some sense of--I 
have actually made that request, if you would consider that, 
that you would give us that and we treat it as classified.
    And it is not because it is a national security secret, but 
it is, practically speaking, a little bit like why all of the 
time that we have worked on, for example, the expansion of 
NATO, it is not a good thing to put out the list that we are 
looking into, because it creates expectations, and if 
expectations are not met then there are consequences.
    But at any rate, can you describe in a more generic form 
the percentage prospects that you think the nations will----
    Mr. Larson. Well, yes, sir. And very briefly, what tends to 
happen is that you get a group of roughly ten to a dozen 
countries. Obviously, by definition, all are very poor 
countries with per capita incomes under $1,440 or so. Some are 
African countries, and some are in this hemisphere.
    And by definition, they are all countries that have shown 
themselves to be performing relatively well under these 
indicators in the areas of government, social investment and 
their own economic policy framework.
    Senator Biden. So the bottom line is you think that there 
are enough potential recipients that our assistance will have 
some impact that goes beyond arguably a suitable country. In 
other words, this notion that--I assume one of our objectives 
here is to promote--again, if I can make an analogy to a 
military alliance, one of the greatest things for the expansion 
of NATO in my view was the so-called Parry principle, which 
required nations to settle non-military issues in order to 
qualify.
    I would respectfully suggest that the Hungarians would have 
never worked out their differences with the--or I suggest that 
Poland would have never really worked out its border disputes. 
I suspect that a lot of things would not have occurred were it 
not for the carrot out there of NATO and the realization that 
you had to meet this requirement in order to be eligible for 
consideration.
    So I assume one of our purposes here is not only to 
identify nations that would qualify now, but that when other 
nations realize that what they need to qualify, that it 
requires them to have a system that is more consistent with the 
principles that we are laying down here, that this will grow. 
Our goal is for the number of recipient nations to grow, not to 
diminish, correct? I mean, I assume we are all on the same 
page.
    Mr. Larson. Well, you are correct both in your analysis 
and--you are correct in the assumption that we would like to 
see this number grow, and you are also correct in suggesting 
that even now each of us are seeing very dramatic evidence that 
countries are looking at their policies with exactly the same 
results that you hope for, that ``We better do a better job on 
governance or some other issue if we hope to qualify for this 
program.''
    Senator Biden. Well, I wish you luck. I have a question 
that I would like to submit in writing so I do not trespass 
into Senator Alexander's time, about why integrating within the 
existing structure does not work. I mean, we have got--you 
know, we went through this reorganization. And why is the 
administration suggesting we establish a new aid organization? 
Why not within the existing administration? And as we work 
through that, the question remains. And you talked a little bit 
about are you going to have call on some of the 8,000 folks in 
USAID to accommodate the ability to function. That will be 
useful for me to know.
    The Chairman. If you would respond to that question----
    Senator Biden. I will submit it to you in writing. I would 
appreciate it.
    The Chairman. I join the Senator from Delaware in asking 
for a classified or unclassified estimate of countries 
eligible. However, I would mention that in our second panel, 
Mr. Radelet has already listed 13 countries and published that 
in the Washington Quarterly, spring of 2003 issue.
    So we will get another point of view, or maybe the same 
one.
    Mr. Taylor. May I say something briefly about this?
    The Chairman. Yes.
    Mr. Taylor. I think one of the real nice things about this 
or the way this is constructed is these indices are publicly 
available. So if Senator Biden and his staff would just look at 
what the ranking is and the index on civil liberties or the 
heritage index for free trade, you will see right away what 
countries are close to meeting these. It is very transparent, 
and that is why it is so easy to replicate, as many people in 
the private sector are beginning to do. That is a feature.
    But there will be missing data. There will be revisions to 
data. And that is why the judgment ultimately is required. And 
any one list at this point could be potentially misleading.
    The Chairman. We will ask staff to go to the Web sites and 
begin to cull out this information for us.
    Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    I am all for this Millennium Account idea, and I have some 
thoughts about it, and I have a question about it that I would 
like to ask. And I hope I did not miss this when I was 
somewhere else earlier, so please tell me if I did.
    I like the idea of awarding countries who are working hard 
to improve their incomes and expand their freedoms. And I think 
human nature is such that if you do it with a few people and 
you have a lot of flexibility in how you go about it, that you 
might learn something and you actually might succeed in doing 
it.
    I also think it is much easier for the American taxpayers 
to understand foreign aid. It has always been said that it is a 
constituent of one, the President. And so I think it is easier 
for taxpayers to understand in these countries, that creating 
jobs and expanding freedoms, that that is worth rewarding.
    As I look over the criteria, I think back on the economic 
development and the things that I have been involved in as a 
Governor. And it is not so different in other countries. They 
are starting with less freedoms, but when I became Governor, we 
were 70, 80 percent of the national average income and we 
wanted to get up to 100.
    There were a lot of things we did. But as I look back on 
it, what helped cities in our State and our State more than 
anything else was first identifying something that was unique 
to our State, something, some strength that we had.
    Much more than any kind of indicator of how much you are 
spending on health, how much you are spending on this, or 
whether you have civil liberties, or--all those things are 
important and are indicators, but how does Memphis get from 
where it is to where it goes? Well, it first remembers that it 
is on a river, and it remembers that its agriculture is 
important and not to be embarrassed about. And then it 
remembers that it has a central location, which is why Federal 
Express is there. And it has the Peabody Hotel where ducks walk 
across the--you know, every day at regular hours in the parlor, 
and people come to see it.
    And they celebrate those strengths. And the people of east 
Tennessee celebrate their Appalachian culture, and Nashville 
celebrates Music City.
    So I am wondering if as--my inclination would be for you to 
be as flexible as possible. I would take the risk of failing, 
and I would take the risk that one administration might do 
something that another one would not.
    I mean, who is to say that there is not a little bit of 
rewarding going on today as we look around the country and at 
the Security Council with our present policy? So that is going 
to happen.
    So let me take a specific example. Let us take Gabon in 
Africa. There they set aside 12 percent of their land for 
national parks. That would be celebrating something that is 
unique and special about a country that is poor and has not got 
so many institutions that would help it expand its freedoms and 
grow its incomes. Would a strategy that is based on starting 
with creating 12 percent of your land in national parks and 
letting other institutions and other improvements come from 
there, would that fit within the kind of criteria that you are 
considering for grants from the Millennium account?
    Mr. Larson. Yes. I think you are focusing in on a very 
important issue of what do we actually do with this money once 
a country is eligible. We have put a lot of emphasis on these 
criteria and indicators for getting into the program; but once 
a country is in the program, then it becomes exactly the sort 
of process you highlighted of identifying the comparative 
advantage, identifying the one big push that can really take 
them to the next level.
    I mean, to take--and what the President has made clear is 
that we want to be able to be involved in any project that is a 
growth generator or a productivity driver. We have given some 
examples--agriculture, health education, trade, small business 
expansion, but----
    Senator Alexander. But what about conservation?
    Mr. Larson. But a national park--I mean, if this--you gave 
the example, Senator, of Gabon. I mean, let us suppose that 
they felt that ecotourism was a real driver of economic 
growth----
    Senator Alexander. Yes.
    Mr. Larson [continuing]. They could expect to bring lots of 
people in, generate jobs for their people. That would be 
something that one could look at.
    But what the goal is to achieve growth, because growth will 
generate the resources if properly used to bring people along.
    Senator Alexander. Right. Right. But I am suggesting that 
even before you get to the business of creating growth, that in 
the case of Gabon--and I am not even sure this is true or not 
true, I am just trying to get it down to specifics--that before 
you get to results, even--or programs, you need a sense of 
confidence, a sense of spirit--I mean, a community needs to 
come together for some reason and say, ``Hey, we have got 
something here. Let us work together to go forward.''
    And in one place it might be oil. In another place, it 
might be a national park. In another place, it might be a 
devotion to education. In another place, it might be the 
location of--the weather. It might completely depend, but it 
would be a coalescing spirit that causes the country to 
actually want to work together and then you can get to all 
these other things. And it would seem to me you would not want 
to jump over that if you are really--it is like a nurturing a 
child and helping to what identify the strength of that child 
is.
    Mr. Larson. We put great emphasis in our description of how 
we imagine this program working. The process of citizen 
participation, the coalescing of the society around development 
goals.
    We have made clear that we believe one of the 
responsibilities of a partner country would be to have that 
sort of process so that any development priority was not the 
development priority only of the President or only of the 
Finance Minister, but it was the priority of the country.
    So we do see this idea of citizen involvement, involvement 
of civil society and coalition and coalescence being very 
important to the idea.
    Senator Alexander. My last comment, and I would not want to 
push the analogy too far, but I remember in the case of both 
Memphis and Chattanooga when they were beginning processes 20 
years ago to try to move their cities, which they have done a 
magnificent job of, in our initial discussions I actually asked 
them to go back home and create much larger broad-based groups 
of people and go through a broad-base process, all of which 
sounds very mushy, to try to set up some goals.
    And in Memphis, there were 2000 people who did that, in 
Chattanooga there were several hundred. And out of that 
actually came specific objectives, a sense of ownership and 
there may be some usefulness in that metaphor.
    The Chairman. Thank you very much, Senator Alexander. Let 
me ask if there are other questions from Senators that you 
would wish to ask of this panel?
    Senator Hagel. I have one.
    The Chairman. Senator Hagel.
    Senator Hagel. Mr. Chairman, thank you. I had just one. You 
all are well versed in the Foreign Assistance Act of 1961, 
which I have portions of that law in front of me, Public Law 
87-195.
    And as I have read it again--my staff gave it to me 
yesterday--almost everything that you are talking about 
accomplishing, focusing on in this Millennium project is 
covered already under public law. The criteria, they spell it 
out: transparency, freedom, women's rights, and so on. It is 
all here. I assume you have seen it all.
    So I assume--I suspected as most Americans--that we are 
already doing this as we focus on foreign affairs and where our 
foreign aid goes and on what basis that foreign aid is 
allocated. So it is already here. It has been around for a long 
time, so I assume USAID is already following this, so I have 
not heard anything new here today that already is not in law.
    Now, the question is--two questions really, is USAID not 
capable of administering a program like this? Why would we set 
up a new program? Why would we set up a new bureaucracy? Why 
would we set up a new structure?
    And then the second part of that, which I ask tangentially, 
be--but we could not answer because OMB preferred not to come 
up here: Is it standard practice for OMB to participate on a 
board that actually sets policy, that actually participates in 
implementing policy that this board obviously would do, since 
OMB is already the court of last resort when it comes to money 
and budgets and management as far as I know. And I think they 
guard that rather well, and they should.
    So I know you cannot answer for OMB, but anything you can 
tell me about that, and then really, but my major question is 
to why is USAID not capable of doing this, since everything you 
are already talking about is in law now. This is not a 
revolutionary thought as to why we grant our foreign aid 
assistance the way we do.
    Mr. Natsios, you may begin. Thank you.
    Mr. Natsios. Foreign aid serves many purposes. One purpose 
is humanitarian assistance regardless of the national 
government, regardless of reform to people who are in the 
middle of a famine or a civil war or an epidemic or that have 
very high rates of child mortality, for example.
    You know, Afghanistan had the worst human misery index in 
the world prior to September 11. And our assistance to those 
countries is not based on the performance of the government. 
Indeed, in many of the cases, there are no governments.
    Somalia has not had a government in 10 years. The Taliban 
was not really a government in a formal sense. And there are 
those countries that are not going to be covered by the MCA. 
USAID, however, spends $2 billion a year in dealing with those 
failed and failing States.
    There are another set of countries that are critically 
important geo-strategically for the United States. I have to 
tell you I know which countries they are--I do not want to 
embarrass countries, but, you know, our program there is for 
political and diplomatic reasons. Appropriately, you can guess 
what they are. We have added a few countries to the list in the 
last year just since the terrorist wars started. This 
legislation is not directed to those countries.
    Some programs we run are regional in nature. They are not 
country specific, because the programs like some of the great 
river systems in Latin America or Africa, require regional 
approaches. They are not country specific, and they require us 
to set up regional governance structures. MCA does not deal 
with that. OK.
    Our development assistance account is actually a relatively 
small part. This year, it is about $1.3 billion of the $10 
billion we spend. Only $1.3 is really in the area that you are 
talking about. So it is a relatively small portion.
    What the President is proposing here is a massive increase 
in that portion that should be based on criteria. And I think 
the difference between the Foreign Assistance Act and this 
legislation is that the Foreign Assistance Act does not say 
that the allocation of resources will be based on past 
performance. That is a profound shift not only in the United 
States but in international institutions and in other donor 
governments.
    That is not how we are allocating aid now. And the 
difference is, for 20 years now, we have been focusing on what 
is called conditionality. We will give you this money, this 
additional aid, if you will do these things that are good 
things to do in terms of policy in the future.
    Well, it has not worked very well, because half of the time 
the countries never do the things that they say--because there 
is no local commitment as Senator Alexander properly pointed 
out. Unless there is local commitment, it does not work very 
well.
    So what this is saying, this is creating some competition. 
Some of the countries actually told me they resent this. And I 
said, ``Well, I am very sorry if you resent it.''
    They say, ``Well, we are not going to be eligible for 
this.''
    I said, ``There is a reason for it. You are not doing the 
things needed to make your country progress.'' We are going to 
give money and distinguish the countries that really are 
performing. And most of us know what those things are.
    That is not how aid is distributed now. There are other 
criteria that we use in a variety of areas.
    Senator Hagel. So USAID could not do that. That is why we 
require a new bureaucracy, to do this.
    Mr. Natsios. Well, it is not a new bureaucracy. Let me----
    Senator Hagel. It is not new?
    Mr. Natsios. No. In the sense that there is only----
    Senator Hagel. Oh, according to what you have given me 
here, 100 new staff people----
    Mr. Natsios [continuing]. 100 people----
    Senator Hagel [continuing]. And we are going to confirm a 
new director.
    Mr. Natsios. It is a coordinating office in Washington. A 
hundred people cannot spend $5 billion, I do not think. Our 
testimony is that other U.S. Government agencies that do work 
in the field, including USAID will, in fact, be managing 
portions of this in the field.
    And the President does not want parallel structures.
    Senator Hagel. My question is: USAID is not capable of 
doing that now?
    Mr. Natsios. I think we do a good job, but we have many 
different demands on us right now. And this account is trying 
to separate out, funds to reward performance. The problem we 
have is we have many, many demands on our existing program that 
are not based on performance.
    Senator Hagel. Thank you, Mr. Chairman. May Secretary 
Larson respond? Thank you.
    Mr. Larson. I wanted to just add three quick points.
    First of all, USAID enjoys great confidence in the 
administration, and they are being asked to do many, many more 
tasks, even in the President's proposed budget.
    Second, it has been commented earlier in the hearing that 
foreign assistance has a constituency of one, that the American 
people do not understand the relatively small amount of money 
that is going to it and they are not sure they are getting the 
results.
    One of the things that I believe the President feels 
strongly is that in asking the Congress and through the 
Congress the American people for what amounts to a 50 percent 
increase, it is very important to show that we are doing some 
things differently with this program and that one of the things 
we are doing, and this is the last point is that in this 
program, we are focused very tightly on developmental outcomes. 
We are focusing on a select group of countries that are 
committed to reform. And we are doing the whole process in the 
most transparent way that we have ever done before, and the 
American people can see what is--how decisions are being made 
with these incremental resources.
    Senator Hagel. Thank you. Mr. Chairman, thank you.
    The Chairman. Thank you very much, Senator Hagel.
    Senator Chafee, do you have further questions of the panel?
    Senator Chafee. I know the second panel is coming up. I do 
have one quick one. Mr. Larson, did you say that--I think I 
heard you right that the board will be able to make some 
decisions themselves as to the allocation of the money. The 
board is really going to have a lot of power.
    Mr. Larson. Yes. The board has a number of responsibilities 
that are set out in the authorization, setting policy and 
setting the framework, but also including making final 
decisions about selection of countries.
    And we believe--I know the Secretary of State believes that 
it is important that at the end of the process that there is 
Cabinet level accountability to the President and to the 
Congress and to the American people about the decisions that 
are making, who is in this program, and how the money is being 
used.
    The Secretary has made very clear to me that in his view 
this does not mean injecting non-developmental considerations 
into the process, but it does mean being sure that we are--have 
confidence that the indicators and the other sources of 
information that we use to help us form a judgment about 
whether a country meets the President's criteria, you know, 
there needs to be a review of that.
    It could be just a case of data--I mean, I will give you an 
absurd example, a country might look very good on the basis of 
the criteria; but last month there was a military coup, they 
abolished human rights, and they adopted backward looking 
economic policies.
    You know, you would not expect--and no one would expect 
that the board would nevertheless approve MCA eligibility for 
that country. That is an extreme example, but it is, 
nevertheless, an example of an area where we believe and the 
Secretary believes that there is an element of judgment, that 
this board like any board should be expected to exercise. They 
are going to do it in a very transparent way, so that you and 
the American people will see.
    Senator Chafee. Now, just to followup, I think what Senator 
Hagel was driving at is that the program is essentially 
targeted for the people, and sometimes the people do not agree 
with what their government is doing. And I think that is where 
we have our questions. Let me go to the second panel.
    Mr. Larson. Yes. Well, and, again, sir, we are very 
sensitive to the issue that some people have the misfortune to 
live under very bad government. And that is why we have 
humanitarian programs. That is why we try in some of those 
places to work through non-governmental organizations to 
provide certain types of services.
    But we do believe that when it comes to getting the biggest 
developmental impact out of our dollars that we need to be 
working in countries that are governed justly, and that do have 
a good economic framework, and are making investments in their 
own people. And so for this program, for this program, we want 
to make sure that we are concentrating on those types of 
situations.
    The Chairman. Thank you, Senator Chafee. We thank the 
panel.
    Let me just say for the record we have the draft 
legislation that you have proposed and likewise it has been 
received by the House International Relations Committee.
    And we have had consultations with them. They want to act 
quickly and we do too. I would say that each one of us on this 
committee will try to become more familiar with the criteria. 
We have had a number of questions about that today, about how 
USAID will interact, about Mr. Natsios's work there. He 
commented to the staff and likewise to the Senators that is 
important to consider.
    We want to try to think through with the U.N. formally and 
with others from the non-governmental organization community 
how their efforts in these countries will either interact or 
impact, or how the governments that are involved will deal with 
all the requirements for data or for concepts that are a part 
of this, and are an important part.
    And those will be considerations as we try to take a look 
at the language that has been presented to us. We may make some 
revisions or suggestions as we proceed.
    And we thank you all for a very constructive piece that 
helped each one of us today. We have had good participation, 
and we look now to the next panel.
    The Chair would like to call now Dr. Steven Radelet, senior 
fellow of the Center for Global Development; Ms. Mary E. 
McClymont, president and CEO, Interaction, Washington, DC; and 
Ms. Susan Berresford, president, Ford Foundation of Washington, 
DC. Thank you.
    Thank you, Secretary. Thanks so much for coming over.
    [Brief recess.]
    The Chairman. If we could reassemble now and obtain order 
in the committee room, the Chair would appreciate it, because 
we want to proceed with the distinguished panel. I have 
introduced you, and I will ask you to testify in the order I 
introduced you.
    Understand, please, that your full statements will be made 
a part of the record, and we will ask you to summarize 
appropriately.
    Dr. Radelet.

  STATEMENT OF DR. STEVEN RADELET, SENIOR FELLOW, CENTER FOR 
               GLOBAL DEVELOPMENT, WASHINGTON, DC

    Dr. Radelet. Thank you. Thank you for the opportunity to 
testify on this very important issue. I think overall the 
Millennium Challenge Account is a program that is worthy of our 
support. It could be one of the most important changes in U.S. 
foreign assistance policy in many decades. With modifications, 
however, I think it could be even better.
    U.S. foreign assistance, in my view, stands at an important 
crossroads. If the Millennium Challenge Account is implemented 
well, with strong design, sufficient staffing, particularly on 
the ground, and if it is well coordinated with other programs, 
it could significantly improve U.S. foreign assistance, not 
only within itself, but other programs as well.
    However, if it is not done carefully and the Millennium 
Challenge Account fails, it could set back support for other 
foreign assistance programs at great cost to our security, our 
humanitarian goals, and other foreign policy goals.
    There are several strengths to this program. First, its 
focus on poverty and growth will help clarify the mission of 
the organization. It concentrates on countries with committed 
governments, which will ensure results, stronger results. It 
calls for strong recipient country participation, which should 
help set clear priorities and also strengthen results. And it's 
very transparent, both in the selection process, also in the 
proposal design, and in the proposed evaluation process. All of 
these strengths are worthy of keeping.
    I should mention that the greater recipient involvement 
goes hand in hand with selectivity. There was a lot of talk 
this morning about the small number of countries that might 
qualify for this. That goes hand in hand with the opportunity 
to provide those countries with much more say in how these 
funds would be used.
    The more we expand the program, I think the less--into less 
responsible governments, the less able we are to involve those 
governments in setting priorities and giving them more 
flexibility and responsibility.
    There are four key issues in my view to making sure this 
program works well. One is the country selection process. As 
you have already mentioned, using the administration's 
criteria, I have gone ahead and constructed a list of 
countries.
    There was talk about your staff getting the indicators off 
the Web site. There is no need. You can just ask me. I have all 
of them already. I would be happy to share them with you.
    Now, this is my list. It is not the administration's list. 
They are right. The data will change. I have talked to my 
friends at the World Bank Institute. They create five of the 
sixteen indicators. In 2 weeks time, they are going to change--
they will update those indicators, so this list will change. 
And I think there is good reasons why the administration has 
not gone public with the list.
    But according to the data that are available today, there 
are 13 countries that would qualify in the first year.
    In the second year, only 11 countries would qualify, as the 
pool of countries expands, the medians rise, and fewer 
countries meet the standards.
    In the third year, in addition to those that are already 
qualified, a new group of countries become eligible. Four 
additional countries would qualify by these standards.
    I should note that my list has already changed in the last 
2 months as new data has become available. My updated list is 
part of my testimony and the list will change.
    My biggest concern about the selection process is the 
addition of the third group of countries in year three with 
incomes between $1,435 and $2,975. In my judgment, these 
countries should be omitted. Their needs are much--although 
there is poverty in these countries, their needs are much less 
acute than in the poorer countries. They have much greater 
access to private sector financing and so less need for aid. 
And third of all, it could politicize the process because, as 
you mentioned earlier, Egypt, Colombia, Jordan, Turkey, and 
Russia are in the group of qualified--or of eligible countries.
    The second issue that should be considered to improve this 
is the median scores. Using--I think they should use absolute 
scores rather than medians. There is a particular problem with 
using median scores.
    As we encourage other countries to improve their scoring, 
the medians go up. And so countries that once qualified will 
not qualify as other countries improve their standing. We need 
absolute standards that countries can move toward and not 
moving targets.
    We can strengthen some of the indicators, particularly the 
budget indicator, the trade indicator, the expenditure items, 
and the business days. There are several that can be improved; 
others that can be added, the ratio of boys to girls in school, 
school enrollment rations, private sector--the State control of 
private sector assets and some other health indicators.
    There is several ways that that these indicators can be 
strengthened and improved. And for those reasons, I think it 
should not--those--the 16 indicators should not be legislated. 
But I do think it is important that the administration be 
required to report regularly to Congress on exactly what the 
process is and exactly what the outcomes are, so that--and to 
consult with you so that you can add your views as to how to 
improve the system as it goes forward.
    The second big issue is the corporation itself. There are 
some advantages of a new corporation. It could reduce political 
pressures. It could improve on bureaucratic procedures and move 
out of the way of the multiple mandates that USAID now operates 
under.
    But it could also further fragment foreign assistance 
policy. It could lead to redundancy, to more confusion. It 
could impede coordination and create rivalries.
    It seems odd to me to have multiple Presidential appointees 
in charge of foreign assistance policy.
    It could work out, but it will need to have much stronger 
coordination, with USAID on the board, perhaps plus some 
outsiders on the board, not just government officials as we do 
with OPIC and AXIOM. There should be clear methods of 
coordination. I think Mr. Natsios' testimony deserves careful 
study for their ideas for further coordination.
    There needs to be much more adequate staff of the 
corporation, particularly on the ground. I do not see how this 
program can be run effectively with 100 people on the ground, 
and I think there is a danger that it could be starved before 
it gets off the ground. We need good staffing on the ground to 
make this work.
    The third issue is the opportunity to improve operations on 
the ground. The contracts are a good idea, but in the--and the 
proposals are a good idea, but the administration is now 
proposing that these only come through the governments. And I 
think that is a mistake.
    It needs to be an open process with other entities within 
the recipient countries eligible to write proposals, including 
NGOs, sub-national governments, and others.
    There is a danger in its current proposal that it could 
enlarge the size of recipient governments, which is something 
that we do not want.
    Related to this, we must have a very strong monitoring and 
evaluation program on the ground. And the administration has 
not unveiled its plans for how it is going to do that, but it 
is absolutely central to making sure the countries meet the 
standards that are there, achieve the benchmarks, how we 
allocate funds to the best programs and how we can think about 
reducing funds when programs fail.
    There needs to be an independent monitoring and evaluation 
process, and that has not yet been spelled out.
    On the ground also, development takes time. There was talk 
this morning about the need for countries to move off onto a 
sustainable basis. Development takes a long time.
    Ghana, which may--is a good candidate for this program, 
their current income is $350 per year. If they grow at 7 
percent per year per capita, a very, very high growth rate, it 
will take them 20 years to reach $1,435, the standard of just 
the first group in the MCA. And it will take many more years to 
reach $2,975.
    Development takes a long time. Twenty years of great 
performance might get Ghana to a graduation level.
    Finally, we have to have strong clear programs for 
countries that do not qualify. Only a small number of countries 
will qualify for this program. I think that is OK, because it 
brings with it a way to bring those countries in in a much more 
flexible way.
    But we have to have other kinds of programs to deal with 
the many countries that do not qualify. Mr. Natsios laid out 
some preliminary plans this morning. We need to look at those 
more carefully. But we need to think very creatively about the 
countries that do not quite qualify, the countries that are 
mediocre, countries that are failed and weak States, and how we 
can modify our current programs to make them much stronger in 
order to achieve our development goals in those countries. 
Thank you very much.
    The Chairman. Thank you very much, sir.
    [The prepared statement of Dr. Radelet follows:]

Prepared Statement of Steven Radelet, Senior Fellow, Center for Global 
                              Development

    The Millennium Challenge Account (MCA) could bring about the most 
fundamental change to U.S. foreign assistance policy since President 
Kennedy introduced the Peace Corps and the U.S. Agency for 
International Development (USAID) in the early 1960s. The significance 
of the proposed program lies partly in its scale: the proposed $5 
billion annual budget represents a 50 percent increase over the $10 
billion annual foreign aid budget in FY '02 and a near doubling in the 
amount of aid that focuses strictly on development objectives.
    Perhaps even more important than its size, however, is its 
potential to distinguish itself from existing aid programs. Through 
four guiding principles, the MCA could greatly improve the allocation 
and delivery of U.S. foreign assistance:

   It selects a relatively small number of recipient countries 
        based on their demonstrated commitment to sound development 
        policies;

   It provides them with sums of money large enough to make a 
        real difference;

   It gives them more say in how the funds are used (relative 
        to current programs); and

   It holds them much more accountable for achieving results, 
        including being willing to increase funding for successful 
        programs and reduce it for weaker programs.

    Overall, the MCA initiative is worthy of strong support. It builds 
on America's core values of generosity, commitment to progress, and the 
expectation of clear results. Many of the ideas in the administration's 
proposal are appropriate and would make the U.S. foreign aid program 
more effective. With some adjustments, the initiative could be 
strengthened further. There are four key areas that require further 
consideration:

   the country selection process;

   the administrative structure within the USG;

   operations on the ground once countries are selected; and

   a strategy for the countries that will not qualify for the 
        MCA.

    I first comment on the strengths of the administration's proposal, 
and then on each of the four key areas for further consideration.
                       strengths of the proposal
    There is much in the administration's proposal that should be 
commended and preserved.
    (1) Focus on poverty and economic growth. The MCA is clearly aimed 
at reducing poverty and stimulating economic growth in low-income 
countries, and not to reward diplomatic partners for strategic 
initiatives. The program's sharp focus will enable it to define 
specific goals, ensure that resources are better allocated to meet 
those goals, and allow for stronger and clearer evaluation of results. 
This should help ensure that both recipient countries and the American 
public get better outcomes from the program.
    (2) Country Selectivity. A central idea of the MCA is that aid can 
be more effective if it is focused on nations with governments that are 
committed to establishing policies and institutions conducive to 
economic growth and poverty reduction. Larger, more flexible programs 
like the MCA should be used in countries with a strong development 
record, while different strategies with more limited funding and more 
structured programs should be used in other countries.
    (3) Recipient country participation. The proposal implements a new 
approach in which government and non-government groups in qualifying 
countries take the lead in developing and defending their own ideas for 
using aid. This so-called ``foundation'' approach makes particular 
sense in well-run countries where there is the freedom and the 
capability to develop and manage programs. It has the advantage of 
allowing for real participation by civil society groups in recipient 
countries, both in the design of the overall MCA strategy and in 
implementation of funded projects and programs. The ``selectivity'' 
principle of the MCA goes hand-in-hand with improved recipient country 
participation.
    (4) Transparency. The proposed process is remarkably transparent, 
from the use of publicly available selection criterion, to wide public 
participation in formulating strategies and programs, to posting agreed 
``contracts'' on the internet (although the legislation should ensure 
that all agreed contracts are thus posted). The administration is 
proposing a process through which it can be held publicly accountable 
for choosing appropriate countries and funding strong programs.
                     the country selection process
Basic Methodology
    The administration has proposed using 16 specific indicators to 
choose countries for the MCA (Table 1), grouped into the three broad 
categories proposed by the president: ``ruling justly,'' ``investing in 
people,'' and ``establishing economic freedom.'' Countries must score 
above the median (measured against all broadly eligible countries) on 
half or more of the indicators in each of the three groups to qualify 
for the MCA. That is, they must surpass the median in three of the six 
``ruling justly'' indicators, two of the four ``investing in people'' 
indicators, and three of the six ``establishing economic freedom'' 
indicators. In addition, a country must score above the median on 
corruption, regardless of how well it does on all the other indicators. 
This proposed methodology is basically sound, with some caveats as 
discussed below.
    Using publicly available data and this methodology, I have produced 
an illustrative list of countries that might qualify for the MCA during 
its first three years.\1\ It is crucial to emphasize that this list is 
illustrative: data on all 16 indicators will be updated before the 
program actually starts in October, so the group of top countries will 
change. In fact, the 16 indicators (from the World Bank Institute's 
governance data set) are due to be updated by the end of March 2003, so 
the list is likely to change within a few weeks.
---------------------------------------------------------------------------
    \1\For a detailed description see Steve Radelet, ``Qualifying for 
the Millennium Challenge Account,'' http://www.cgdev.org/nv/Choosing--
MCA--Countries.pdf
---------------------------------------------------------------------------
    Moreover, the administration proposes to reserve the right to add 
or subtract a limited number of countries in determining the final set 
of qualifying countries. This last step introduces an element of 
subjectivity that probably is necessary given the weaknesses in the 
data, but must be used very selectively to guard against too much 
political influence in the selection process.
Possible Qualifying Countries
    In the first year, the administration has proposed that the pool of 
countries eligible for consideration for the MCA should be those that 
have an average annual per capita income below $1,435 and are eligible 
for concessional borrowing from the World Bank. There are 74 countries 
in this group. Table 2 shows that 13 of these countries might qualify 
for the MCA based on data currently available. Two other countries 
(Moldova and Nicaragua) failed to qualify because their corruption 
scores were below the median, although they met all the other 
requirements. Seven other countries miss qualifying by one indicator.
    In the second year, the administration proposes expanding the pool 
of eligible countries slightly in line with an increase in program 
funding to include all countries with average per capita incomes below 
$1,435, regardless of their borrowing status with the World Bank. This 
change increases the total number of eligible countries to 87. The new 
countries tend to be better off on average than the original 74, so the 
median values that a country must exceed to qualify rise on most of the 
indicators.
    As a result, only 11 countries qualify in the second year, 
including 8 that had qualified the first year. The three new countries 
are China, the Philippines and Vietnam, although China will not receive 
MCA funds.
    In the third year, the administration proposes sharply expanding 
the pool of eligible countries in year three (in line with the increase 
in annual funding to the full targeted amount of $5 billion) to include 
28 nations with average per capita incomes between $1,435 and $2,975. 
This group of countries would be judged separately from the 84 
countries with average incomes below $1,435, with their own median 
scores used to assess country qualification. Adding this last group of 
nations is controversial. The administration's main reason for 
including them is that many people in these countries still live in 
poverty. However, as conveyed by Table 3, this group of nations is far 
better off than the 87 countries eligible in year two, with average 
incomes more than four times higher, much lower infant mortality rates, 
and much higher literacy rates. They also have much greater access to 
alternative sources of financing, with higher private capital flows, 
saving rates, and government revenues.
    Thus, including this new group of countries would divert aid 
resources away from countries with greater needs and fewer financing 
alternatives. In addition, adding this group heightens the possibility 
that MCA funds will be diverted to support political allies as it 
includes Colombia, Russia, Egypt, Jordan, and Turkey, among others. In 
my opinion, these 28 countries should not be eligible for MCA funds. 
Alternatively, if they remain eligible, the administration should 
allocate only a limited portion (a maximum of $1 billion) of the annual 
$5 billion for them, with the rest reserved for the poorest nations.
    Based on data available today, 4 of these 28 nations--Bulgaria, 
Egypt, Namibia, and South Africa--would qualify in year three if the 
administration's proposal were adopted, as shown in Table 2. Note that 
these countries are in addition to those that qualify in year two (not 
instead of), since they compete to qualify as a separate group.
    Thus, based on the administration's proposal, over the course of 
the first three years 19 different countries (excluding China) might 
qualify for the MCA. Eighteen others miss qualifying by one indicator 
(including corruption). Conceivably several of these countries could 
improve their scores and attain qualification within a few years, thus 
increasing the number of MCA countries. Of the 19 countries most likely 
to qualify, 8 are in sub-Saharan Africa (SSA), 5 are in South and East 
Asia, 3 are in Eastern Europe and Central Asia, 2 are in Latin America, 
and 1 is in North Africa.
Strengthening the Selection Process
    In my opinion, the selection process should not be legislated--the 
administration will need some flexibility to adapt the system during 
its early years--but Congress should expect regular and thorough 
reporting on the selection process. The administration's proposed 
methodology to select MCA countries is a reasonable initial approach, 
by and large. However, the process could be improved with some 
relatively modest changes:

   As discussed, eliminate the countries with incomes between 
        $1,435 and $2,975 from eligibility to focus the MCA on 
        countries with the greatest needs and least alternative 
        financing options.

   Change the qualification standard on each indicator from 
        median scores to fixed levels (e.g., a 75% immunization rate). 
        Median scores will change from year-to-year, creating a moving 
        target for countries hoping to qualify.

   Modify the requirement that countries must score above the 
        median on corruption to qualify for the MCA. Although 
        corruption is extremely important, the data are not reliable 
        enough to be used to eliminate countries.

   Strengthen some of the indicators, especially the trade 
        deficit, the budget and expenditure data, and days to start a 
        business.

   Consider adding a limited number of additional measurable 
        indicators, including the ratio of girls-to-boys in school, an 
        additional health indicator, and a measure of state ownership 
        of productive assets in manufacturing and retail trade (but not 
        in utilities and basic service delivery).

    Finally, although the indicators give a strong weight to democracy 
(through 3 of the 16 indicators), there is no firm requirement for a 
country to be a democracy to qualify for the MCA. A small number of 
non-democracies appear on the list of possible qualifiers shown in 
Table 2. The question is whether the MCA should be aimed at all low-
income countries that are committed to use aid effectively to fight 
poverty and stimulate growth, or limited to democracies with that 
commitment. A rule requiring countries to pass a democracy hurdle 
(while leaving other selection criteria the same) would reduce the 
number of qualifying countries during the first three years from 19 to 
14.
                        administrative structure
A New Corporation?
    The U.S. foreign aid system, particularly USAID, is bogged down 
under heavy Bureaucracy, overly restrictive legislative burdens, and 
conflicting objectives. The MCA is intended to be different. The 
administration has proposed that the program be administered through a 
new ``government corporation,'' designed to reduce administrative costs 
and increase effectiveness.
    The biggest advantage of establishing a new organization is that it 
could avoid the political pressures, bureaucratic procedures, and 
multiple congressional mandates that weaken current aid programs. Its 
status as an independent body could make it more flexible and 
responsive as well as allow it to attract some top-notch talent. Since 
the MCA is supposed to do business differently than other aid programs, 
with a narrower focus, higher standards, and more flexibility, it 
follows that there is a strong case for situating the MCA in a new 
institution.
    However, establishing a new corporation risks further fragmenting 
foreign assistance programs across the Executive Branch. Major foreign 
assistance programs currently reside at USAID, the State Department, 
Treasury, and the Peace Corps, with other programs at HHS, the 
Department of Agriculture, the African Development Foundation, the 
Inter-America Foundation, and several other agencies. Adding yet 
another agency could impede coordination and increase redundancy.
    An alternative structure would be to house the MCA in a new office 
or bureau at USAID. It would report to the Administrator, but would 
otherwise be separate from the existing USAID bureaucracy. It would 
require separate authorizing legislation to ensure greater efficiency 
and reduced administrative burdens. Staff could be a combination of 
USAID personnel and staff detailed from other agencies. This structure 
would put the major development programs under a single presidential 
appointee and ensure greater coordination of programs.
    If the plan to establish the corporation goes forward, several 
steps should be taken to ensure it works as effectively as possible:

   The Board should include the administrator of USAID rather 
        than the Director of OMB. In addition, it should include a 
        small number of outside experts representing private business, 
        NGOs, or others with development expertise. Alternatively, an 
        outside advisory panel could support the Board's operations.

   Staffing needs to be adequate for the task, especially on 
        the ground. The administration hopes to keep the corporation 
        small, but its projected staffing of 100-200 people seems 
        insufficient for a program with an annual budget of $5 billion. 
        It would be unfortunate if the zeal to make the new corporation 
        as lean as possible resulted in poor evaluation, oversight, and 
        coordination. Furthermore, it is not clear who will represent 
        the MCC on the ground in the qualifying countries, where a 
        strong presence will be required to achieve success.

   Much stronger coordination mechanisms will be necessary, 
        both amongst USG agencies and with multinational organizations. 
        One of the biggest concerns is the impact of the new 
        corporation on USAID and the relationship between the two 
        organizations. The corporation is likely to draw staff and 
        resources from USAID, further weakening the agency, possibly 
        engendering some resentment, and making cooperation more 
        difficult. Having both agencies operate simultaneously in 
        recipient countries could be very confusing for recipient 
        countries, create coordination problems and unnecessarily 
        duplicate services. To date, these coordination issues 
        apparently have received very little attention.
            operations on the ground once countries qualify
Contracts
    The proposal to enter into ``contracts'' with recipients is 
basically sound, as it puts program design and implementation 
responsibilities squarely with the recipient country while building in 
clear accountability for achieving agreed benchmarks. However, the 
administration's proposal seems to envisage that a recipient government 
would coordinate a variety of proposals from government and non-
government groups, and, through a local consultative process, 
consolidate them into a single contract with the MCC. This could 
inadvertently enlarge the power and bureaucracy of the recipient 
government. A better approach would have the MCC accept proposals from 
a variety of organizations within eligible countries, including sub-
national governments and non-government groups. This would create a 
larger administrative burden for the new corporation, but it would lead 
to better quality and more effective programs on the ground.
Monitoring and Evaluation
    To be successful, the MCA will require a very strong monitoring and 
evaluation (M&E) system. Strong M&E will be central to allocating funds 
appropriately, learning what works and what doesn't, avoiding 
absorptive capacity problems, and otherwise making the program more 
effective. Each ``contract'' should include clear plans for the 
recipient to establish internal M&E operations. In addition, an 
independent outside M&E function will be crucial, perhaps through the 
GAO. Without a much stronger monitoring and evaluation (M&E) capacity 
than in past programs, the MCA will be doomed to fall.
    The results of these evaluations must be taken seriously if the MCA 
is to succeed. Strong M&E programs will help redirect activities that 
have gone off course, provide the basis for increasing funding for 
successful activities, and reducing funding for weak programs. The USG 
must be willing to reduce or eliminate MCA funding for programs that 
are not achieving results. Recipient countries will quickly recognize 
whether program benchmarks are taken seriously or not. Where programs 
are succeeding, they should be funded generously; where they are off-
track, funding should be reduced; and when they fall, funding should be 
directed elsewhere. Being true to this principle will certainly 
distinguish MCA from existing aid programs.
    Although the focus on results is critical, at the same time it is 
important to keep expectations in line with reality. Development takes 
time. Recent analysis of the experience of 22 relatively successful 
developing countries (such as Korea, Thailand, Chile and Botswana) 
shows that for those countries it took an average 12 years before their 
aid levels were reduced by 50 percent, and 24 years before their aid 
levels fell by 75 percent.\2\ Many MCA recipients will continue to be 
low-income countries with limited access to private sector financing 
for many years, even if all goes very well. Consider Ghana, a prime 
candidate for the MCA, with current per capita income of $350. If it 
does everything absolutely right and achieves per capita growth of 7% 
per year (equivalent to about 9% overall growth, a rate achieved by 
only Korea, Botswana, and a few other countries), it will take Ghana 21 
years to reach per capita income of $1,435.
---------------------------------------------------------------------------
    \2\See Michael Clemens and Steven Radelet, 2003, ``The Millennium 
Challenge Account: How much is too much, how long is long enough?'' 
www.cgdev.org/nv/features--MCA.html.
---------------------------------------------------------------------------
Earmarks and Tied Aid
    The Congress can play an important role in shaping this legislation 
and helping pave the way for the program to be both more responsive to 
needs on the ground and more cost-effective in achieving results. The 
promise of the MCA to be different--to make a measurable difference in 
the lives of the poor--requires that both the Administration and 
Congress act differently that they have in the past. Congress, of 
course, has both the right and the responsibility to direct where 
appropriated dollars should be spent. However, too much detail in this 
directive process is counterproductive.
    Congress should resist the temptation to earmark, even to target 
what may seem like important activities and countries. The accumulation 
of such earmarks, even when they seemed sensible and enlightened, 
gradually undermined USAID's ability to respond flexibly and 
efficiently to the changing needs of recipient countries. Congress 
should also resist the temptation to ``tie'' MCA assistance to U.S. 
goods and services, as has been the case with the vast majority of past 
U.S. bilateral assistance. Tied aid reduces the effectiveness of 
foreign assistance, by some estimates reducing the ultimate value to 
the recipient by 25%.
                working in countries that do not qualify
    The MCA promises to be a terrific program for the countries that 
qualify, providing them with generous funding and more flexibility in 
setting program priorities. However, it will reach a relatively small 
number of countries, and so by itself is not a complete foreign 
assistance strategy. Of particular importance are the countries that 
just miss qualifying for the MCA, the so-called ``tier II'' countries.
    One approach would be to expand the MCA to include a larger number 
of countries. But this could dilute the basic promise of the program: 
keep it narrowly focused, fund the countries generously, and provide 
them with more flexibility. If the group of countries were expanded to 
those with weaker governments, it would be more difficult to provide 
recipients with the responsibility and flexibility that offers the most 
promise of setting the MCA apart.
    A better approach would be for USAID to work with these countries 
to develop strategies to help them eventually gain eligibility for the 
MCA. For example, traditional aid programs could be changed to allow 
them to write limited proposals focused on the specific areas where 
they fall short of qualification. It may make sense to use some MCA 
funding for this purpose. But the second tier countries should not be 
part of the MCA until they meet the eligibility requirements.

               TABLE 1. ELIGIBILITY CRITERIA FOR THE MCA

  Note: To qualify, countries must be above the median on half of the 
              indicators in each of the three sub-groups.


------------------------------------------------------------------------
              Indicator                              Source
------------------------------------------------------------------------
I. Ruling Justly                       .................................

     1. Control of Corruption            World Bank Institute
     2. Rule of Law                      World Bank Institute
     3. Voice and Accountability         World Bank Institute
     4. Government Effectiveness         World Bank Institute
     5. Civil Liberties                  Freedom House
     6. Political Rights                 Freedom House
------------------------------------------------------------------------

II. Investing in People                .................................

     7. Immunization Rate: DPT and       WHO/World Bank
 Measles
     8. Primary Education Completion     World Bank
 Rate
     9. Public Primary Education         World Bank
 Spending/GDP
    10. Public Expenditure on Health/    World Bank
 GDP
------------------------------------------------------------------------

III. Economic Freedom                  .................................

    11. Country Credit Rating            Institutional Investor
    12. Inflation                        IMF
    13. Regulatory Quality               World Bank Institute
    14. Budget Deficit/GDP               IMF/World Bank
    15. Trade Policy                     Heritage Foundation
    16. Days to Start a Business         World Bank

------------------------------------------------------------------------
Source: ``Fact Sheet: Millennium Challenge Account,'' distributed by the
  administration on November 25, 2002, available at www.cgdev.org.


   TABLE 2. POSSIBLE QUALIFYING COUNTRIES USING THE ADMINISTRATION'S 
                                CRITERIA


------------------------------------------------------------------------
                                  Year 2: All
     Year 1: IDA Eligible       Countries With    Year 3: Countries With
  Countries With Per Capita       Per capita        Per Capita Incomes
   Incomes Less than $1,435      Incomes Less       Between $1,435 and
                                  than $1,435             $2,975
------------------------------------------------------------------------
QUALIFYING COUNTRIES

   1. Albania                  Bangladesh        Bulgaria
   2. Bangladesh               Bolivia           Egypt
   3. Bolivia                  China             Namibia
   4. The Gambia               Honduras          South Africa
   5. Ghana                    Lesotho\1\        .......................
   6. Georgia                  Malawi            .......................
   7. Honduras                 Mongolia          .......................
   8. Lesotho\1\               Philippines       .......................
   9. Malawi                   Senegal           .......................
  10. Mongolia                 Sri Lanka         .......................
  11. Mozambique               Vietnam           .......................
  12. Senegal                  ................  .......................
  13. Sri Lanka                ................  .......................
------------------------------------------------------------------------

ELIMINATED CORRUPTION

   1. Moldova                  Ecuador           .......................
   2. Nicaragua                Moldova           .......................
   3.                          Nicaragua         .......................
   4.                          Ukraine           .......................
------------------------------------------------------------------------

MISSED BY ONE INDICATOR

   1. Cambodia                 Albania           Jamaica
   2. Guyana                   Cambodia          Jordan
   3. India                    The Gambia        Tunisia
   4. Mali                     Georgia           .......................
   5. Nepal                    Ghana             .......................
   6. Uganda                   Guyana            .......................
   7. Vietnam                  India             .......................
   8.                          Kazakhstan        .......................
   9.                          Kyrgyz Rep.       .......................
  10.                          Mali              .......................
  11.                          Morocco           .......................
  12.                          Mozambique
  13.                          Uganda            .......................

------------------------------------------------------------------------
2\1\For Lesotho, data for the corruption indicator are currently
  unavailable, so technically it would not qualify. However, these data
  are expected to become available within the next few months, and
  Lesotho is likely to qualify when the MCA begins in late 2003.

Source: Steven Radelet, updated from ``Qualifying for the Millennium
  Challenge Account,'' www.cgdev.org

 TABLE 3. DEVELOPMENT STATUS, RESOURCES FLOWS AND FINANCING FOR THREE 
                      MCA COUNTRY GROUPS (MEDIANS)


------------------------------------------------------------------------
                                IDA eligible                  Countries
                                  countries     Countries   with incomes
                                with incomes  with incomes     between
                                  less than     less than      $1,435-
                                   $1,435        $1,435        $2,975
------------------------------------------------------------------------
Development Status:

  GNI per capita, 2001........  $380          $460          $1,965
  Adult illiteracy rate, adult  36            33            14
   total, 2000 (%).
  Life expectancy at birth,     54            56            70
   2000 (years).
  Mortality rate, infant, 2000  75            69            27
   (per 1,000 live births).

Resources Flows and Financing:

  Aid/GNI, 2000 (%)...........  10.8          8.5           1.4
  Gross private capital flows/  6.9           8.7           10.3
   GDP (%).
  Tax revenue/GDP(%)..........  11.7          12.6          21.8
  Gross domestic savings/GDP,   7.3           8.4           16.2
   2000 (%).

Number of Countries             74            87            28

------------------------------------------------------------------------
Source: Steven Radelet, ``Qualifying for the Millennium Challenge
  Account,'' www.cgdev.org


    The Chairman. Ms. McClymont.

STATEMENT OF MARY E. McCLYMONT, PRESIDENT AND CEO, INTERACTION, 
                         WASHINGTON, DC

    Ms. McClymont. Thank you very much, Mr. Chairman, for the 
opportunity to testify before you and the committee. I am 
pleased to present today some of the views of InterAction 
members, as well those of the broader NGO development coalition 
that has actually been working together around the MCA over the 
last several months. InterAction has co-chaired that effort 
with the organization, Bread for the World.
    InterAction is the largest alliance of U.S.-based relief 
and development organizations, and our 160 members operate in 
all of the developing countries and have decades of experience 
in development on the ground. Both faith-based and secular, 
InterAction members reach millions of Americans who support 
foreign assistance programs.
    President Bush's announcement of the new MCA has really 
galvanized our community with great interest and support. Not 
only would, of course as everybody has said, these be 
significant new resources, but importantly, the President has 
also underscored that these would be used to ``fight world 
poverty.''
    He has said in other places that expanding the circle of 
development is a ``moral imperative'' and a U.S. foreign policy 
priority.
    Moreover, we believe that the MCA, as you have said, Mr. 
Chairman, provides the opportunity to relook and revitalize and 
perhaps redefine some of our U.S. foreign assistance policy and 
programs and really maximize their effectiveness.
    Although the administration, we believe, has articulated a 
very powerful vision to transform development, many unanswered 
questions remain. And we look forward to working with you to 
further define the MCA and its relationship to the broader 
foreign aid program.
    We have put forward some recommendations. They are attached 
to my testimony. But before, I turn to just highlighting 
several of them, I would like to place the MCA in the broader 
context of U.S. development assistance and foreign policy.
    We believe the MCA must be seen as just one tool to 
stimulate broad-based economic growth and prosperities in 
developing countries. To leverage it, we need a comprehensive 
U.S. strategy to guide all of our development through not only 
programs of assistance, but thinking through coherence around 
trade, economic policies, debt relief, and private investment 
flows.
    This broader strategy then could go guide and hopefully 
bring more coherence among and between the various development 
assistance programs and enhance the whole effort.
    So to be successful, the MCA must be seen in this larger 
strategy for needs development, and not in a vacuum. As many 
have said, the MCA is intended to be a bonus pool for a small 
group of countries, not meant to replace the development 
assistance for the many poor countries that will not qualify. 
Neither is it intended to address humanitarian concerns such as 
disaster response or refugees, or those that need a global 
strategy, such as HIV/AIDS. Yet, these objectives are also 
critical.
    Countries in which peoples' basic needs are met are more 
stable. It makes for a more stable world.
    So we underscore, and Mr. Chairman we thank you for your 
remarks, funds for the MCA should be in addition to and not a 
substitute for other core bilateral development and 
humanitarian programs.
    In short, we need to ensure that the core development 
programs work together with the MCA to accomplish our goals.
    I will now try to highlight--I am going to touch very 
briefly on seven of our key principles, our priorities for your 
consideration, Mr. Chairman. And I give more detail in our 
submitted testimony.
    First, the purpose. We urge the MCA funds be targeted for 
poverty-focused development, advancing the Millennium 
development goals in the poorest nations.
    In announcing the MCA, the President endorsed these so-
called Millennium development goals, which are really 
internationally agreed targets to cut in half poverty and 
improve health and education. These goals, among them to 
educate children, help mothers and children stay alive, and 
reduce hunger, are all concrete concerns we have discovered 
through our polling, are things Americans believe our 
assistance programs, development assistance programs should 
support.
    Importantly, these goals might be able to provide an 
overarching framework for the MCA and have several advantages. 
They could leverage more donor support, and they could try to 
bring everybody into the circle, and get international buy-in 
from other donors to leverage our money.
    Second, country eligibility, the MCA should, we believe, 
target the strongest performers in the poorest countries, 
specifically the low-income countries under IDA. These low-
income countries, as Mr. Radelet has suggested, lack good 
access to or means of attracting other financial resources and 
they are much more in need of assistance per se largely than 
the lower middle income countries that the administration would 
bring in in year 2006.
    If there is a concern about not enough poor countries 
meeting eligibility, we would propose that perhaps the pool 
will be expanded by providing a lesser amount of MCA funds for 
sort of a second tier of countries, which would be the near-
miss countries that just do not quite qualify.
    Third, program design, we wanted to stress this point, Mr. 
Chairman. Developing countries should be full partners in the 
entire process. Funding decisions should follow the principle 
of country ownership.
    Programs for recipient countries should be designed through 
consultations with, and implemented by, civil society, local 
governments, private sector, as well as the national 
government, and we believe should be based on national 
development strategies within the country.
    Fourth, the MCA assistance should utilize multiple funding 
mechanism, not only government to government grants, but also 
direct funding to civil society organizations, international 
NGOs, as well as local governments. The administration's 
proposal appears to contemplate this approach, and I want to 
stress--or what I believe, is the importance of civil society.
    A robust civil society is critical to achieving good 
governance, accountable governance in a country, and also for 
providing more equitable delivery of services at the local 
level, which helps many marginalized people in a society.
    Five, women's participation is essential to the success of 
all development strategies, and it is critical that gender be 
fully considered in the design implementation and evaluation of 
the MCA programs.
    Six, because broad-based economic growth and social 
development do, as Mr. Radelet suggests, take time, it is 
important that country agreements set reasonable timetables and 
expectations to be met. A careful balance, we believe, should 
be struck between the shorter timeframes for program support 
the administration seeks and a longer term commitment to these 
countries required to truly reduce poverty and bring broad-
based economic growth.
    And finally, Mr. Chairman, the issue of the structure. We, 
our coalition, have proposed a separate, semi-autonomous office 
within USAID to implement the MCA, with new authorities and 
procedures that could enable a faster, more flexible, and more 
innovative set of programs.
    This approach would allow several things, for the MCA to 
help reform and revitalize USAID where needed, enable its 
expertise--and that is to say USAID's experience and 
expertise--to guide the MCA, and hopefully bring more policy 
coherence and less fragmentation to our foreign assistance 
programs.
    Should the Congress agree with the administration's 
approach to establish a separate entity, we would recommend at 
least three key steps for strong linkages to and a meaningful 
role by USAID. No. 1, the MCC should use the existing 
mechanisms and improve them where needed at USAID for 
implementing programs and disbursing funds.
    Two, the MCA should contemplate--which does contemplate 100 
staff people only, should make use of the field structure of 
USAID, rather than trying to establish a new presence in MCA 
countries.
    And third, we believe USAID should be brought on the board 
of the MCC so it can offer its strong institutional experience 
to inform policies and judgments.
    In short, the MCA will include only a small group of 
countries. But USAID continues to struggle with the difficult 
challenge of the many other developing countries, including the 
failed States and also including those poor countries, which 
are struggling very hard in the development process.
    In those countries, development assistance targeted to 
reform-oriented leaders, institutions, and communities can 
truly make a difference and really lay the foundation for 
future reform.
    So with that, I will close, Mr. Chairman. Thank you very 
much.
    The Chairman. Well, thank you very much, Ms. McClymont.
    [The prepared statement of Ms. McClymont follows:]

Prepared Statement of Mary E. McClymont, President and CEO, InterAction

    Thank you, Mr. Chairman, for the opportunity to testify before this 
Committee on the Millennium Challenge Account. I also want to 
acknowledge the leadership and support that you, Senator Biden, and 
many others on this Committee have provided on issues of importance to 
those of us in the humanitarian and development community. I am 
grateful for the opportunity to present some of the views and 
perspectives of InterAction members and the broader NGO development 
community on the Millennium Challenge Account.
    InterAction is the largest alliance of U.S.-based international 
development and humanitarian nongovernmental organizations. Our 160 
members operate in every developing country and have decades of 
experience on the ground in working to overcome poverty, exclusion and 
suffering by advancing social justice and basic dignity for all. While 
many in our membership have a long and successful history of 
partnership with U.S. government agencies, collectively, the members 
receive $3 billion in annual contributions from private donors, 
including direct contributions from the American people. Both faith-
based and secular, InterAction members are headquartered in 25 states 
and have branch offices and/or constituencies in every state in the 
country. Furthermore, when you look at the donors, sponsors, and 
supporters of our member organizations, InterAction reaches millions of 
Americans who care about and support in some form our foreign 
assistance programs. I come before you to reflect views from this 
broad-based coalition.
    President Bush's announcement in March 2002 of a new ``Millennium 
Challenge Account'' (MCA) has galvanized great interest and support 
from the development community. Under the MCA, the President has 
pledged additional funds beginning in FY 2004, leading to a $5 billion 
annual increase in development assistance over current levels by 2006. 
According to the President, funds would go to selected countries that 
govern justly, invest in people, and encourage economic freedom. These 
are new and significant resources. Importantly, the President has also 
made clear that the funds will be used to ``fight world poverty'' and 
``bring hope and opportunity to the world's poorest people.'' It is a 
significant signal that the United States must play a much larger role 
in fighting world poverty, a point the President recognized by making 
it a ``moral imperative'' and a U.S. foreign policy priority. Indeed, 
development is now a key component of the National Security Strategy.
    In announcing this pledge, the President endorsed internationally-
agreed targets for cutting in half extreme poverty around the world and 
for substantial improvements in health and education in developing 
countries by 2015, known as the ``Millennium Development Goals''. These 
goals, which include improving access to basic education, helping 
mothers and children stay alive, advancing the status of women and 
girls, improving access to clean water, and reducing poverty and 
hunger, are all concrete concerns supported by the American people, 
based on polling commissioned by InterAction and other organizations.
    In fact, we believe President Bush's strong and consistent 
statements reflect a growing consensus in this country that development 
assistance can bring lasting and positive change in the lives of the 
world's poorest people. Indeed, the MCA provides the opportunity to 
revitalize and redefine foreign assistance policy of the United States 
and to maximize the impact, effectiveness and coherence of our aid 
programs. It will have a critical effect on the way development is 
carried out in the years to come by the United Slates and other donor 
nations.
    For these reasons, the new initiative must be shaped and defined in 
a careful and comprehensive way. The Administration has articulated a 
powerful vision to transform development; yet, many unanswered 
questions remain as to what this assistance will fund, how it will be 
implemented and how it will relate to other foreign assistance programs 
of the U.S. government. We hope that this Committee and your colleagues 
in the House of Representatives will take up the challenge and work to 
further define and shape the MCA and its role and relationship to the 
rest of our foreign aid program. We look forward to working with you 
and with the Administration to fashion an innovative and effective 
fund.
    To that end, InterAction has developed a set of recommendations as 
to how the new account should be developed and implemented. We have 
brought together 40 of our member organizations and the broader 
development community to create a consensus around a set of principles 
and priorities for the MCA. InterAction developed a policy paper in 
May, and subsequently with the broader community, a legislative 
proposal that we have shared with Members of Congress and with the 
Administration. With your permission, Mr. Chairman, I would like to 
submit for the record our initial policy paper, The Millennium 
Challenge Account: A New Vision for Development, along with our 
legislative proposal on the MCA.
    I will touch on several of our specific recommendations in a 
moment, but first let me place the Millennium Challenge Account in the 
context of a broader reassessment of U.S. development assistance and 
foreign policy.
                          the larger framework
    Although it represents a significant step forward, the MCA must be 
seen as just one tool to stimulate broad-based economic growth and 
prosperity in developing countries. To leverage it, a comprehensive 
U.S. development strategy should be designed. This strategy should 
include clear goals, realistic timetables, and sufficient resources for 
reducing poverty and meeting the Millennium Development Goals through 
programs of assistance, trade and economic policies, debt relief and 
private investment flows. It should identify strategies to promote 
development in the countries that will not be eligible to receive 
assistance under the new account, and address such complex issues as 
how the Millennium Development Goals can be met by finding new ways to 
deal with trade barriers, debt reduction and tied aid.
    To be successful, the Millennium Challenge Account must be seen 
within this larger strategy for development. In short, the MCA cannot 
be considered in a vacuum if ``the advance of development,'' which the 
President has called a ``central commitment of American foreign 
policy,'' is to be truly realized. After all, as the President has 
defined it, the MCA is a bonus or incentive pool of large, concentrated 
assistance that will be directed to a small, select group of countries 
that meet the eligibility criteria set forth in the President's 
proposal. It is not meant to replace the development assistance being 
provided largely by the U.S. Agency for International Development 
(USAID) to poor countries that for the most part do not meet the rather 
stringent criteria. And I will come back to that point. Further, the 
President has underscored that funds for the MCA would be in addition 
to, and not a substitute for, other core bilateral development and 
humanitarian programs.
    In February 2002, one month prior to the President's announcement, 
InterAction launched a campaign, the Global Partnership for Effective 
Assistance, a multiyear effort to save lives and build self-sufficiency 
by increasing development and humanitarian assistance, improving aid 
effectiveness, and building international partnerships. In the broadest 
sense, this campaign aims to help reinvigorate America's role in 
partnering to build safer, more stable and democratic societies. 
Effective assistance programs with concrete, realistic goals and 
adequate funding are key ingredients for reducing poverty and meeting 
basic needs. The issue is not only about how much money is spent, but 
also how the money is spent. To that end, we are working to influence 
the policy debate and raise public awareness about the importance of 
aid effectiveness.
    The MCA initiative, which we strongly advocate for in our campaign, 
can be a critical new instrument of policy to fight poverty. Yet, as 
noted, it envisions funding for a limited number of qualifying 
countries and does not address the development needs and objectives in 
the many nations that won't qualify. The initiative also does not take 
into account humanitarian concerns such as disaster response and 
refugees, or areas that may need a global or regional strategy, such as 
HIV/AIDS. Yet we know that these objectives are critical and that 
countries in which peoples' basic needs are met are more stable and 
less prone to conflict.
    That is why InterAction's campaign urges that the MCA be seen as a 
part of the overall aid strategy, and that existing bilateral aid 
programs in the foreign operations budget be increased. These programs 
build self-sufficiency by promoting basic education, healthcare, job 
and business skills, reducing hunger, women and girls, refugee and 
disaster response, and peace and democracy. In short, programs funded 
under these core accounts, if carried out effectively, can build 
capacity in people and lay the groundwork for additional nations to 
qualify for the MCA in future years.
    It is critical, therefore, that funding for these programs not be 
cut or diverted to fund the MCA. We must also guard against the 
fragmentation of our foreign aid program that can lead to 
uncoordinated, inefficient and duplicative use of resources. Instead, 
we must ensure that core development programs work together with the 
MCA to meet the international goals for poverty reduction, promote 
broad-based economic growth, and help create a better, more secure 
world. If we do it right, the MCA can serve as the catalyst for a 
comprehensive and coherent new aid policy that recognizes progress and 
encourages change.
    We believe the Millennium Challenge Account offers an opportunity 
to maximize the impact of our development assistance. Behind the new 
initiative should be an understanding that for development to succeed 
in the long run, there must be the right mix of good policies, 
sufficient resources, measurable goals, coordination among donors, 
effective innovative delivery mechanisms, and the program ownership and 
participation of developing nations. Both sides of the development 
equation--rich and poor countries alike--must make a commitment to 
reform, and hold themselves accountable for the results.
                                the mca
    With this broader context in mind, I will highlight several of the 
key principles and priorities of concern to us that I hope you and your 
Committee, Mr. Chairman, will keep in mind as you work to shape and 
define the Millennium Challenge Account in the months ahead.
Purpose
   We urge that funds from the new account targeted for 
        poverty--focused development--advancing the Millennium 
        Development Goals in the poorest nations. These goals provide a 
        broad framework for the MCA, including parameters for the 
        sectors on which the MCA should focus. Furthermore, they serve 
        as useful mechanism to both leverage funding from other donors 
        and to secure international support for this new framework for 
        development. And, the American public is supportive of the 
        concerns addressed under the MDGs, such as basic education, and 
        advancing the status of women and girls.

   In its proposal, the Administration has indicated that the 
        goal of the MCA is ``to reduce global poverty through increased 
        economic growth.'' It is correct to highlight the importance of 
        economic growth, as there is ample evidence that sustained 
        growth is essential to poverty reduction in developing 
        countries. However, it is also clear that growth by itself is 
        not sufficient. While we agree about the importance of economic 
        growth in helping countries meet their development objectives, 
        it must be broad-based growth that is built on policies that 
        promote equity, reduce poverty, and provide robust investments 
        in people. Achieving a just, equitable pattern of growth and 
        development has important implications for the type of 
        investments to be financed by the MCA.
Country Eligibility
   The MCA should target strong performers among the poorest 
        countries. The Administration's proposal, however, would also 
        allow lower-middle income countries to be eligible in 2006 and 
        beyond. We recommend targeting MCA assistance to low income 
        countries eligible to borrow from World Bank International 
        Development Association (IDA). Many of the lower middle income 
        countries do indeed have many poor people and face significant 
        development challenges. They, however, also have better access 
        to means of attracting other financial resources and are less 
        in need of the MCA assistance than the low-income countries.

   If there is a concern that not enough poor countries will 
        meet the eligibility criteria, then we would advise that the 
        pool be expanded by providing a lesser amount of MCA funds to 
        the ``near miss'' countries to help them qualify in future 
        years. Our legislation call for a second tier of MCA countries 
        that would fall into this category. Thus a part of the MCA 
        funds could be directed towards building capacity and creating 
        incentives for countries to graduate to the first tier.

   With regard to the specific indicators as outlined by the 
        Administration, we welcome the use of publicly-available 
        indicators to select MCA countries because that approach offers 
        a potential for transparency and allows for monitoring of the 
        selection process by civil society and other interested 
        parties. There are several details of the criteria and 
        selection process, however, on which our members have differing 
        views. InterAction has not made specific recommendations on the 
        indicators themselves.
Program Design/Funding Process
    We suggest in our legislative proposal ``implementation 
agreements'' between recipient countries and the United States which 
would establish the funding parameters and guidelines under which 
proposals could be submitted by various governmental, private sector, 
and civil society or NGO actors. The Administration's proposal does not 
detail how its MCA contract relates to the proposal process.

   Developing nations should be partners in the formation and 
        implementation of the new account, and broad participation of 
        the private sector and civil society should be evident 
        throughout. Funding decisions should follow the principle of 
        country ownership, and should ensure that resources support 
        priorities identified by the country's government, in 
        consultation with its citizens. MCA assistance programs for 
        recipient countries should be designed through consultations 
        with, and implemented by, civil society, local governments and 
        the private sector as well as the national government. The MCA 
        should support locally conceived and implemented national 
        development strategies such as the Poverty Reduction Strategy 
        Papers (PRSP). The Administration's proposal is properly 
        supportive of country ownership and broad consultation, but 
        this language could be reinforced and further defined.

   Women's participation is essential to the success of all 
        development strategies. For example, the World Bank has noted 
        that countries can significantly boost productivity and 
        economic growth by focusing on the abilities and potential of 
        their women. To benefit from these synergies, it is critical 
        that gender be fully considered in the design, implementation 
        and evaluation of MCA programs.

   Because broad-based growth and social development take time, 
        it is important that country agreements or contracts set 
        reasonable timetables and expectations. The Administration has 
        indicated it would like to see results in short timeframes. A 
        careful balance must be struck, however, between shorter 
        timeframes for program support, and a longer-term commitment to 
        poverty reduction and broad-based growth. Exit strategies for 
        ending aid should be carefully planned in collaboration with 
        recipient countries.

   The MCA assistance should utilize multiple funding 
        mechanisms including, but not limited to, government to 
        government grants, as well as direct funding to civil society 
        organizations, international private voluntary organizations, 
        as well as local governments. The Administration's proposal 
        appears to contemplate this approach. I stress the importance 
        of civil society and private voluntary organizations because, 
        even in the best performing nations, governments often do not 
        have open transparent and inclusive processes to engage civil 
        society. And yet, a robust civil society is critical to 
        achieving good, accountable governance. NGO and civil society 
        implementers also help ensure a more equitable delivery of 
        services at the local level, particularly to segments of the 
        population that might otherwise be neglected or marginalized.

   Donor coordination is important to increase effectiveness 
        and reduce wasteful financing. The United States cannot 
        undertake the global development challenge on its own. We must 
        leverage the resources of other donors and, more importantly, 
        of the developing countries themselves. Too often, competing 
        requirements from different donors place undue burdens on 
        developing countries. The MDG framework provides one mechanism 
        to ensure donor coordination since the international community 
        has already agreed to these targets. Using national development 
        strategies or PRSPs is another. The Administration's proposal 
        acknowledges the importance of donor coordination. However, it 
        places the burden solely on recipient countries. We believe 
        responsibility should be borne by both the donor and developing 
        countries.
Implementation Structure
   We have proposed a separate, semi-autonomous office within 
        USAID to implement the MCA, with new authorities and procedures 
        that enable faster, more flexible and more innovative 
        programming to assure funds are programmed effectively and 
        expeditiously. Such an approach would allow for the MCA to help 
        reform and revitalize USAID, enable its experience and 
        expertise to guide the MCA, and help further policy coherence 
        and coordination among various foreign assistance programs.

   The Administration proposes to set up a new entity to 
        implement the MCA, the Millennium Challenge Corporation. If the 
        Congress agrees with the Administration's approach to establish 
        a separate entity, it will be critical to avoid duplication of 
        effort, competing priorities and contradictory policies. We 
        would therefore recommend the following steps to establish 
        strong linkages to and a central meaningful role for USAID in 
        order to foster policy coherence in our development programs.

          (1) The MCC should utilize, and improve upon, where 
        necessary, existing mechanisms at USAID for implementing 
        programs and disbursing funds.

          (2) The MCC, which contemplates only about 100 staff, should 
        make use of the field infrastructure of USAID rather than 
        trying to establish a new presence in MCA countries. This will 
        also help improve coordination between USAID run programs and 
        MCA programs.

          (3) USAID should be on the board of the MCC. This would 
        enable USAID, with its strong institutional experience and 
        knowledge in international development to inform Board 
        decisions and policies, including selection of countries, 
        development of country strategies, and review of funding 
        proposals.

    I conclude with a few words on the continuing role and importance 
of USAID in our development and foreign policy. The MCA will likely 
include only 15 to 20, selected countries. USAID, however, continues to 
have the difficult challenge of assisting the larger universe of 
developing countries. It includes a group of failed, or failing, states 
which require largely humanitarian assistance, such as disaster aid or 
HIV/AIDS funds. There are also many other low income countries that are 
struggling in the development process, making progress in one area and 
falling back in another. It is in these countries where development 
assistance targeted to reform-oriented leaders, institutions, and 
communities can make a difference. Assistance targeted to building 
capacity in both government and civil society and delivering key 
services can lay the foundation for future reform.
    We believe that the MCA can play a transforming role in U.S. 
development policy. The President has laid out a bold new vision for 
expanding the circle of development. Mr. Chairman, your Committee will 
play a pivotal role in shaping this initiative. Many questions remain 
to be addressed on the MCA and we welcome the opportunity to work with 
you in the weeks and months ahead.

[Attachments]

     The Millennium Challenge Account: A New Vision for Development

               A Policy Paper from InterAction--May 2002

                                foreword
    These recommendations on the creation and implementation of the 
Millennium Challenge Account are offered by InterAction, the largest 
alliance of U.S.-based international development and humanitarian 
nongovernmental organizations. With more than 160 members, both faith-
based and secular, operating in virtually every developing nation, we 
work to overcome poverty, exclusion and suffering by advancing social 
justice and basic dignity for all.
    This paper offers a set of recommended guidelines for the design 
and implementation of the Millennium Challenge Account for overseas 
development, announced by President Bush in March 2002. The paper was 
developed through consultations with our membership. We hope it will 
serve as an important resource for policymakers as they craft this new 
initiative. Our InterAction community looks forward to an open and 
constructive ongoing dialogue with the Administration and the Congress 
on the Millennium Challenge Account in the months ahead.
                           executive summary
    The Millennium Challenge Account (MCA) presents a unique moment to 
fundamentally transform U.S. development policy and maximize its 
impact. Success of the MCA will have a critical effect on the way 
development is carried out in the years to come by the United States 
and other donor nations.
    The purpose of the MCA should be to demonstrate how poverty can be 
reduced and the Millennium Development Goals (MDGs) can be met through 
the right mix of good policies, sufficient resources, measurable goals, 
coordination among donors, effective innovative delivery mechanisms, 
and the program ownership and participation of developing nations. Rich 
and poor countries alike must make a commitment to reform, and to hold 
themselves accountable for results.
    Although the Millennium Challenge Account is a significant step 
forward, it is just one tool to stimulate broad-based economic growth 
and prosperity in developing countries. To leverage the Millennium 
Challenge Account, a comprehensive U.S. development strategy should be 
designed. It should have clear goals, realistic timetables, and 
sufficient resources for meeting the MDGs through programs of 
assistance, trade and economic policies, debt relief and private 
investment flows.
    The debate over the Millennium Challenge Account has only begun, 
and the broader question, how it helps redefine U.S. development 
policy, will not be answered by a single paper any more than it will be 
answered by a single meeting. Rather, the solutions will be multi-
layered and subject to alterations until the right fit is achieved. 
This paper, which includes key design and implementation guidelines, 
should he viewed in the same way, as an initial framework for 
policymakers designing the Millennium Challenge Account, and 
positioning it in the broader mosaic of an overarching foreign policy.
     summary of key guidelines for the millennium challenge account
Focus
   Funds from the new account should be used to advance the 
        Millennium Development Goals.

   Funds from the new account should focus on the poorest 
        countries.
Eligibility
   Eligibility criteria should serve as an incentive, rather 
        than a reward, for good performance.

   The impact of the MCA will be closely related to the level 
        of funding provided for a country, which is why there should be 
        a limited number of nations that receive funding each year.
Implementation and Administration
   Developing countries should be partners in the development 
        and implementation of the new account, and broad participation 
        of the private sector and civil society should be evident 
        throughout.

   Assistance under the new account should not be provided 
        exclusively to national governments.

   Benchmarks for success should be built into the Millennium 
        Challenge Account.

   lnteragency coordination will be critical to the success of 
        the MCA, and a lead agency should be designated to administer 
        the distribution of funds.

   Improved donor coordination and policy coherence are crucial 
        if the MCA is to succeed and the MDGs are to be met.
The Broader Framework
   Because only a limited number of countries will qualify for 
        assistance under the Millennium Challenge Account, it is vital 
        that the new account complement other development programs.

   Funds from the Millennium Challenge Account must be provided 
        as an addition to, not a substitute for, other development and 
        humanitarian programs.

   There must be strong linkage to humanitarian and refugee 
        assistance efforts.

     The Millennium Challenge Account: A New Vision for Development

    In March 2002, the International Conference on Financing for 
Development in Monterrey, Mexico, brought world leaders together to 
discuss ways of building a more prosperous world community. They sought 
commitments by both rich and poor nations to help reach a set of 
internationally-agreed targets for the halving of extreme poverty 
around the world and for substantial improvements in health and 
education in developing countries by 2015. Endorsed by 189 counties at 
the September 2000 U.N. Millennium General Assembly, collectively these 
are known as the Millennium Development Goals (MDGs).
    At the time of the Monterrey conference, President Bush indicated 
America's support for these goals. He reaffirmed the commitment of the 
United States to bring hope and opportunity to the world's poorest 
people and pledged new resources to fight world poverty. The funds 
would be provided through a ``Millennium Challenge Account,'' which 
would increase U.S. development assistance over three years, leading to 
a $5 billion annual increase above current levels by 2006.
    InterAction applauds President Bush's commitments and pledges to 
work in partnership to make the MCA a success. InterAction, the largest 
alliance of U.S.-based international development and humanitarian 
nongovernmental organizations, with 160 members operating in virtually 
every developing country with local partners, is uniquely positioned to 
offer guidance on maximizing the new account's effectiveness in the 
fight against poverty.
                      a new vision for development
    The Millennium Challenge Account (MCA) presents a unique moment to 
fundamentally transform U.S. development policy and maximize its 
impact. Success of the MCA will have a critical effect on the way 
development is carried out in the years to come by the United States 
and other donor nations.
    The purpose of the MCA should be to demonstrate how poverty can be 
reduced and the Millennium Development Goals can be met, through the 
right mix of good policies, sufficient resources, measurable goals, 
coordination among donors, effective innovative delivery mechanisms, 
and the program ownership and participation of developing nations. Rich 
and poor countries alike must make a commitment to reform, and to hold 
themselves accountable for results.
    Although the Millennium Challenge Account is a significant step 
forward, it is just one tool to stimulate broad-based economic growth 
and prosperity in developing countries. To leverage the Millennium 
Challenge Account, a comprehensive U.S. development strategy should be 
designed. It should have clear goals, realistic timetables, and 
sufficient resources for meeting the MDGs through programs of 
assistance, trade and economic policies, debt relief, and private 
investment flows. It should identify ways to reach people in the 
countries that will not be eligible to receive assistance under the new 
account, and address such complex issues as how the MDGs can be met by 
finding new ways to deal with trade barriers, debt reduction and tied 
aid. To be successful, the MCA must be placed within this larger 
strategy for development.
    President Bush made another pledge at the Monterrey conference, to 
``jump-start'' the Millennium Challenge Account by ``working with 
Congress to make resources available over the next 12 months for 
qualifying countries.'' Initiating the MCA in FY 2003 will illustrate 
on the part of President Bush and his administration an understanding 
that there is no time to waste on beginning the implementation of this 
initiative. But a down payment on the promise of the MCA should not 
come at the expense of other critical assistance programs, which is why 
funds to jumpstart the program should be added to--not deducted from--
existing humanitarian and development accounts.
    The debate over the Millennium Challenge Account has only begun, 
and the broader question, how it helps redefine U.S. development 
policy, will not be answered by a single paper any more than it will be 
answered by a single meeting. Rather, the solutions will be multi-
layered and subject to alterations until the right fit is achieved. 
This paper, which includes key design and implementation guidelines, 
should be viewed in the same way, as an initial framework for 
policymakers designing the Millennium Challenge Account, and 
positioning it in the broader mosaic of an overarching foreign policy.
    As the Millennium Challenge Account evolves, questions about 
specific aspects of legislation and implementation that are not 
addressed in these initial recommendations will undoubtedly arise. 
While InterAction plans to actively monitor the way in which the MCA is 
shaped, we feel our community being one of the trusted partners in the 
entire process will be a key ingredient to its ultimate success. We 
look forward to providing additional information and guidance as the 
process moves ahead. Some of the member organizations of InterAction 
also will be submitting their own policy papers in the coming weeks, 
with recommendations based on their particular areas of expertise.
          key guidelines for the millennium challenge account
    In defining and implementing the Millennium Challenge Account, 
decisionmakers should follow 12 key guidelines.
Focus
    1. Funds from the new account should be used to advance the 
Millennium Development Goals.

    Development has worked where there has been a sharp focus on 
poverty reduction and on specific programs and policies that address 
the MDGs. Countries requesting assistance should develop their own 
strategies to address these goals.

    2. Funds from the new account should focus on the poorest 
countries.

    Although there are desperately poor people even in middle- and 
high-income countries, the Millennium Challenge Account should focus on 
the countries with the lowest per capita incomes--those eligible to 
borrow from the International Development Association.
Eligibility
    3. Eligibility criteria should serve as an incentive, rather than a 
reward, for good performance.

    President Bush said that for a nation to participate in the MCA it 
should show evidence of ruling justly, investing in the health and 
education of its people, and encouraging economic freedom. While it 
makes sense to focus on countries that fully meet these criteria, 
setting the bar too high could further alienate those facing the 
greatest challenges. If only the best performers are eligible to 
receive assistance, then aid will go to those who least need it. Many 
countries, particularly those in Africa, will once again be left 
behind. At the same time, if eligibility criteria are not sufficiently 
rigorous, there is a danger that recipients will be chosen for 
political reasons.
    Assuming that the selected countries truly meet these criteria, and 
assuming that funds are used only to advance the Millennium Development 
Goals, Congress should provide the kind of flexibility in programming 
that enables quick and effective obligation of funds. if additional 
earmarks, restrictions and conditions are imposed, important 
opportunities for cooperation will be missed, and the transforming 
effect of the Millennium Challenge Account will have been negated.
    Elaborating on the president's eligibility criteria, recipient 
countries should have demonstrated a commitment to, and should be 
taking steps toward:

   Good governance for all of their people, including the poor, 
        through expanding democratic participation, rooting out 
        corruption, upholding human rights, encouraging a free press, 
        protecting and treating displaced people, refugees and asylum 
        seekers fairly, advancing opportunities for women, encouraging 
        the development of civil society, and adhering to the rule of 
        law;

   Investing in the health and education of their people, with 
        careful attention to the needs of women and girls, through 
        budgetary policies that seek to develop human capacity and 
        build sustainable development;

   Economic policies that foster enterprise development, 
        private investment, poverty reduction and prosperity, while 
        taking into account differential impacts on women and men.

    4. The impact of the MCA will be closely related to the level of 
funding provided for a country, which is why there should be a limited 
number of nations that receive funding each year.

    For the MCA to be successful, allocations from the new account must 
be large enough to make a real impact on the lives of large numbers of 
people by leveraging the kinds of policy changes and resource 
commitments that will make the impact significant.
Implementation and Administration
    5. Developing countries should be partners in the development and 
implementation of the new account, and broad participation of the 
private sector and civil society should be evident throughout.

    Once nations have been found eligible for funding, allocations from 
the Millennium Challenge Account should be made in response to 
comprehensive national plans or proposals from the developing 
countries.
    Rather than asking a country to produce an entirely new strategy 
for assistance, a proposal should be based on a nation's own national 
development strategy, such as the World Bank and IMF-initiated Poverty 
Reduction Strategy Papers (PRSPs). To date, however, the PRSP process 
has not been consistently open or accountable and, in some cases, it 
has been conducted without the participation of women and civil society 
organizations. Yet, the benefits of executing the PRSP process as 
envisioned could produce such clear benefits as local ownership, donor 
coordination, and policy coherence.
    A recipient's proposal should identify the programs and projects 
for which it is seeking assistance, describe specific development goals 
and targets to be achieved, and provide measurable indicators of 
success. These plans should detail the involvement and participation of 
other donors, host governments (local and national), private 
businesses, civil society groups and nongovernmental organizations. 
This will help ensure accountability, transparency and local ownership. 
In turn, the MCA would foster donor coordination and private-public 
partnerships, while ensuring that recipient countries assume 
responsibility for successful implementation of the programs.

    6. Assistance under the new account should not be provided 
exclusively to national governments.

    In addition to governments, other channels should be used for the 
implementation of the MCA, including nongovernmental organizations, 
civil society groups, regional and local governments, international 
organizations, or multilateral development banks. In these cases, such 
entities should be eligible to receive funds directly from the new 
account, as appropriate.
    While part of the purpose of the Millennium Challenge Account is to 
strengthen governments that are undertaking the right combination of 
policies, many of them are not yet able to provide adequate monitoring 
and controls over funds. Moreover, working through humanitarian, 
developmental and civic organizations, which have built relationships 
of trust and respect with intended beneficiaries in local communities, 
is essential to maximizing aid impact and ensuring it reaches people 
who need it.
    It should be made clear, however, that funds from the MCA will not 
be used to meet ongoing U.S. commitments to international institutions. 
Further, since one of the greatest challenges to successful development 
has been the overhang of crippling debt, funds from the account should 
be provided only in the form of grants, not loans.

    7. Benchmarks for success should be built into the Millennium 
Challenge Account.

    To determine effectiveness and ensure accountability, clear 
indicators of success need to be established for programs at the 
country level and for the overall MCA. The assistance targets should be 
part of the conditions for the grant, and they should be agreed upon by 
all parties. A certain amount of flexibility should be factored into 
the measurements of success for any program, but not so that it 
compromises accountability.
    Because broad-based economic growth and social development take 
time, the selection of indicators and measures should be realistic and 
thought of as intermediate steps. For example, investments in the 
health and education of a population may take a generation or more to 
``pay off'' in terms of productivity and earnings.
    Technical assistance should be available to help countries devise 
indicators of success and measure results. The MCA should make a 
special effort to help strengthen local capacity in evaluation and 
monitoring skills and tools, both among governmental personnel and 
within civil society.
    Just as recipients will be held accountable for meeting their goals 
under the MCA, industrialized nations should be held accountable for 
meeting their commitments to broader development targets embodied in 
the Millennium Development Goals. To that end, a system should be 
devised for measuring how the success of the MCA and other U.S. 
development programs contribute broadly to the MDGs.

    8. Interagency coordination will be critical to the success of the 
MCA, and a lead agency should be designated to administer the 
distribution of funds.

    Ensuring that the funds are spent accountably and that the goals or 
benchmarks are met will require expertise in all aspects of political, 
social and economic development, reflected in the involvement of 
several federal agencies or offices.
    Once decisions on criteria and country eligibility are made at the 
interagency level, an agency with a commitment to poverty reduction, 
experience in conducting successful development projects, and personnel 
based in recipient countries will be needed to actually administer the 
account. Given the mission of the MCA, the current structure of the 
U.S. government, and the bureaucratic difficulties of building a new 
entity to manage development, the U.S. Agency for International 
Development (USAID) is well positioned to administer the program. Since 
a large infusion of aid could overwhelm USAID's current system, it 
would likely need to establish a separate implementing office.
    If the intention of the Millennium Challenge Account is to reshape 
the way in which the U.S. government views, and conducts, development 
assistance, then the tools and methods employed for these tasks must 
also change. The agency should also have procedures and practices that 
support creativity, innovation, flexibility and quick response to 
ensure that funds from the account are programmed effectively and 
expeditiously.
    Further, additional funds should be made available to cover 
administrative expenses of the administering agency. Costs such as 
salaries, operating expenses, evaluation and monitoring, and technical 
assistance to meet and measure criteria can constitute a sizeable 
percentage of the grant value.

    9. Improved donor coordination and policy coherence are crucial if 
the MCA is to succeed and the MDGs are to be met.

    One of the reasons that assistance programs have not been more 
effective in the past is that donor countries fail to agree on common 
goals and objectives, standards, and requirements. Each donor, 
bilateral and multilateral, requests different types of information and 
documentation from the recipient government, while recommending 
different policies and imposing different types of conditionality. 
There are gaps and contradictions as well as duplication and overlap, 
leaving even the most dedicated reformers without viable options. These 
shortcomings could be alleviated by using the Millennium Development 
Goals as a common set of objectives and a country's national 
development strategy as the agreed blueprint.
    At the Monterrey conference, nations recognized that aid alone, no 
matter how well designed, will not solve the problem of global poverty. 
Real progress requires a combination of efforts in both donor and 
recipient countries. Developing countries must adopt policies to 
mobilize domestic resources, reduce corruption, and attract private 
investment. Industrialized nations must broaden access to their 
markets, help resolve debt crises and improve stability of global and 
regional financial structures. Broad-based economic growth, which can 
only take root in a conducive policy environment, ultimately is the 
most effective means of reducing poverty and increasing standards of 
living.
The Broader Framework
    10. Because only a limited number of countries will qualify for 
assistance under the Millennium Challenge Account, it is vital that the 
new account complement other development programs.

    Unfortunately, many of the countries in which poverty is most 
deeply entrenched and which pose the greatest potential threats to U.S. 
security will not qualify for assistance under the new account. People 
will be overlooked in failed states that are unable to provide basic 
human services, the pariah nations that provide haven for international 
outlaws, and the authoritarian regimes that engender civil unrest and 
unleash aggression against their neighbors.
    While good governance is essential for sustained economic growth, 
discrete development programs to build self-sufficiency can be 
successful in almost any environment. In states where the governments 
are not effective development partners, assistance can be provided 
through local civil society groups and international nongovernmental 
organizations. Incipient democratic movements and economic reformers 
can be strengthened with technical and material assistance. Small 
businesses and microenterprises can be encouraged through access to 
credit. By building human capital, such programs empower individuals to 
meet their own basic needs and lay the groundwork for future growth.

    11. Funds from the Millennium Challenge Account must be provided as 
an addition to, not a substitute for, other development and 
humanitarian programs.

    Increased support should also be directed to existing accounts, 
including Development Assistance, Child Survival and Health, 
International Disaster Assistance, Transition Initiatives, Migration 
and Refugee Assistance, Emergency Refugee and Migration Assistance, and 
International Organizations and Programs.
    Only a small proportion of overall U.S. foreign assistance 
currently goes to the poorest people and the poorest countries. If the 
Millennium Development Goals are to be met, then all U.S. development 
assistance must be increased and sharpen its focus on building 
prosperity from the bottom up. This means expanding access to 
education, health care, jobs, technology and credit, as well as 
broadening democratic participation, combating corruption and promoting 
equality before the law.

    12. There must be strong linkage to humanitarian and refugee 
assistance efforts.

    There is a continuing need to mitigate the number and effects of 
natural and human-caused disasters, as well as to strengthen the 
protection of civilians in complex emergencies. A priority must be 
placed on creating an environment in which refugees and displaced 
persons return voluntarily to their homes in safety and dignity.
    Development does not occur in a vacuum. It cannot be sustained when 
people are forced to flee their homes due to war, famine or natural 
disaster. Even in countries where development is on track, extended 
droughts, floods, earthquakes, and conflicts that spill over from 
neighboring states can arrest progress. Development assistance cannot 
replace refugee and disaster aid, nor can it succeed without them.
    Americans are a caring and giving people, who consistently support 
giving life-saving assistance and protection to refugees and displaced 
people, wherever they may be, and helping them be resettled. 
Development and humanitarian assistance need to be more closely 
aligned. In that way, humanitarian interventions provide a foundation 
for development and prevent disasters from destroying development 
gains.
                               conclusion
    Announcing the initiative for a Millennium Challenge Account was a 
significant first step that has helped to galvanize support for global 
poverty reduction and focus attention on the Millennium Development 
Goals. The real test now, however, is designing a program that will 
meet these goals and ensure that the promised resources materialize. 
Reaching the MDGs will require the combined efforts of the U.S. and 
other donor governments, international financial institutions, private 
businesses and nongovernmental organizations, in developing as well as 
developed countries.
    Over the many years in which InterAction members have carried out 
humanitarian and development projects around the world, they have 
learned valuable lessons about what works and why. Although there have 
been some critiques of development assistance, there have been major 
successes and breakthroughs already achieved.
    With the help of foreign assistance, adult illiteracy in developing 
countries fell from 47 percent in 1970 to 26 percent in 1998; smallpox 
was eliminated from the world in 1977; life expectancy in poor 
countries has risen from 45 to 64; the number of people living below 
the poverty line has fallen by about 200 million, while the world's 
population has grown by 1.6 billion; malnutrition has declined by 17 
percent over the last decade; maternal deaths were reduced by 12 
percent between 1990 and 1995; 55 more democratic governments have been 
elected over the past 14 years; and just last year, catastrophic 
famines were averted in Ethiopia and Afghanistan.
    Americans can be proud of what their tax dollars have achieved 
around the world. The Millennium Challenge Account offers a valuable 
opportunity to put our knowledge and values into action. It can serve 
to leverage more effective and coherent development overall.

                    The Millennium Challenge Account

                         a legislative proposal
    The attached draft authorization bill is a legislative proposal for 
the Millennium Challenge Account developed by InterAction and its 
member organizations as well as other key non-governmental 
organizations active in international development. The legislation is 
consistent with InterAction's White Paper on the MCA and benefits from 
the research and analysis done by many diverse organizations in the 
development community. It is hoped that this draft legislation can 
serve as a vehicle for discussions on the MCA between the 
Administration, Congress and the development community.
    The draft legislation represents the consensus of this coalition on 
the basic principles around which MCA should be organized. This draft 
is evolving and certain sections are being revised and refined through 
an ongoing collaborative process. The basic principles include the 
following:

   The Millennium Challenge Account is one component of U.S. 
        foreign assistance programs and therefore should be authorized 
        under the Foreign Assistance Act of 1971 through amendment of 
        the Act and should be linked to other U.S. assistance programs 
        such as humanitarian, development, and economic assistance.

   Funds appropriated to the MCA must be in addition to the 
        funds authorized for core humanitarian and development 
        assistance programs and not a substitute for funding these 
        accounts.

   In order to maintain the link to core development programs 
        and prevent the politicization of this assistance, the MCA 
        should be implemented by a semi-autonomous office in the United 
        States Agency for International Development and should carry 
        new authorities to allow for new, flexible, and innovative 
        mechanisms to improve delivery and effectiveness of assistance.

   The MCA assistance should be directly linked to advancing 
        the Millennium Development Goals (MDGs) and to national efforts 
        to reduce poverty.

   The MCA should support locally conceived and implemented 
        national development strategies such as the Poverty Reduction 
        Strategy Papers. MCA assistance programs for recipient 
        countries should be designed and implemented through 
        consultations with civil society and local governments as well 
        as the national governments. Proposals for funding should 
        support national development strategies and outline specific 
        development goals consistent with the MDGs.

   The MCA assistance should utilize multiple funding 
        mechanisms including, but not limited to, government to 
        government grants, direct funding of local governments, civil 
        society organizations, and international private voluntary 
        organizations.

   IDA eligibility should be the basic eligibility criterion 
        for MCA assistance.

   To improve the effectiveness of all assistance, the United 
        States must give increased attention to donor coordination and 
        to coherence of trade and economic policies to development 
        objectives.

   The MCA should encourage an emphasis on women both in 
        shaping national development strategies and as the target 
        beneficiaries of development assistance.

    This legislation does not identify specific indicators to measure 
performance under the three areas of eligibility identified by the 
President, ruling justly, investing in people and economic freedom. The 
bill, however, does define the principles under each category of 
criteria which coalition believes should be stressed in determining 
eligibility. The bill also provides for expanded eligibility to enable 
countries that may not meet all the eligibility criteria set forth by 
the Administration to receive assistance under the MCA. The coalition 
continues to discuss specific indicators and data that should be 
utilized in determining eligibility and may have more detailed 
recommendations at a later stage.

                      Millennium Challenge Account

                           authorization bill
                                10-18-02

                                 An Act

    To amend the Foreign Assistance Act of 1961 to establish the 
Millennium Challenge Account for the provision of assistance to certain 
eligible countries and for other purposes.

SEC. 101. SHORT TITLE.

    This Act may be cited as the ``Millennium Challenge Account Act of 
2002.''

SEC. 102. FINDINGS AND PURPOSES.

    (a) Findings.--The Congress finds that--
          (1) A principal objective of United States foreign assistance 
        programs, as stated in the Foreign Assistance Act of 1961, is 
        the ``encouragement and sustained support of the people of 
        developing countries in their efforts to acquire the knowledge 
        and resources essential to development and to build the 
        economic, political, and social institutions which will improve 
        the quality of their lives.''
          (2) On March 14, 2002, in a speech at the Inter-American 
        Development Bank, President Bush noted the successes of 
        development: ``During our lifetime, per capita income in the 
        poorest countries has nearly doubled. Illiteracy has been cut 
        by one-third, giving more children a chance to learn. Infant 
        mortality has been almost halved, giving more children a chance 
        to live.''
          (3) Despite these achievements, there are mounting challenges 
        facing developing countries:
                  (A) Over 100 million children of primary school age 
                remain out of school, 60 percent of them girls.
                  (B) 10 million children die every year of preventable 
                causes, 40 percent of them in the first month of life. 
                Malaria alone takes two lives every minute--mainly 
                children under 5 and pregnant women.
                  (C) Approximately 1.2 billion people live on less 
                than $1 a day.
                  (D) 6 million children die of hunger-related causes 
                each year. 800 million people in the world are 
                undernourished.
                  (E) One woman dies every minute as a result of a lack 
                of access to basic healthcare during pregnancy and 
                childbirth.
                  (F) HIV/AIDS has claimed more than 22 million lives 
                since the beginning of the epidemic making it the 
                leading cause of death in sub-Saharan Africa and the 
                fourth highest cause of death globally.
          (4) Inequalities between men and women undermine development 
        and poverty reduction in fundamental ways. Women's limited 
        access to resources and rights--including the right to 
        participate in social and political processes--limits their 
        contribution to family health, education and wellbeing.
          (5) The United Nations General Assembly in September 2000 
        adopted a set of international goals, known as the Millennium 
        Development Goals, calling for the halving of extreme poverty 
        and for substantial improvements in health and education in 
        developing countries by 2015.
          (6) In announcing the Millennium Challenge Account, President 
        George W. Bush called for a new compact for global development, 
        defined by new accountability for both rich and poor nations; 
        pledged to increase U.S. development assistance by $5 billion 
        per year over existing levels by Fiscal Year 2006; and endorsed 
        the Millennium Development Goals, saying: ``America supports 
        the international development goals in the UN Millennium 
        Declaration, and believes these goals are a shared 
        responsibility of developed and developing countries.''
          (7) The provision of assistance from the Millennium Challenge 
        Account, as defined by President Bush, will be linked to a 
        country's commitment to ruling justly, investing in people, and 
        adopting economic reforms and policies that make development 
        effective.
          (8) The President has called for MCA funds to be provided as 
        an addition to, not a substitute for, other development and 
        humanitarian programs.
          (9) To ensure maximum impact, activities under the MCA must 
        be linked to and coordinated with core development, 
        humanitarian, and refugee assistance programs.
    (b) Sense of Congress.--It is the sense of the Congress that--
          (1) The United States should take global leadership in 
        efforts towards meeting the Millennium Development Goals by 
        expanding funds available for such ends, and ensuring that 
        economic and trade policies cohere with the attainment of these 
        goals. In particular, the United States should seek to address 
        the external debt of recipient countries, including debt owed 
        to the United States and other creditors.
          (2) The Millennium Challenge Account (MCA) provides an 
        opportunity to build upon the successes and lessons learned 
        over the past fifty years of foreign assistance. To improve the 
        effectiveness of development assistance, the U.S. should 
        support locally conceived and implemented strategies. 
        Programming under the MCA should strengthen civil society and 
        participatory processes, and ensure that those affected play a 
        role in designing and implementing strategies. Development 
        assistance that supports governments and civil society working 
        in tandem will achieve better and more sustainable results.
          (3) Effective development assistance requires coordination 
        among donor nations. The U.S. should collaborate fully with 
        developing countries and other donors to support locally 
        developed strategies and to minimize duplication of efforts, 
        competing priorities and burdensome donor requirements.
          (4) Development policies, programs, and practices should take 
        into account the differences in the social, cultural, and 
        economic roles of men and women and should ensure women's full 
        participation.
          (5) The President's pledge of additional funds over three 
        years beginning in fiscal year 2004, leading to a $5 billion 
        annual increase in development assistance over current levels 
        by fiscal year 2006, is a significant step forward in the fight 
        against global poverty. Assistance under the MCA should be 
        provided at levels and for a duration sufficient to enable a 
        country to make significant progress toward meeting the 
        Millennium Development Goals.
    (c) Purposes.--The purposes of this Act are--
          (1) to enhance the U.S. contribution to achieving the 
        Millennium Development Goals;
          (2) to assist men and women in developing countries to 
        acquire the tools needed to lift themselves out of poverty and 
        seize the opportunities of the global economy;
          (3) to enable nations to grow and prosper.

SEC. 103. THE MILLENNIUM CHALLENGE ACCOUNT.

    Part I of the Foreign Assistance Act of 1961 (22 U.S.C. 2151 et 
seq.) is amended by adding at the end the following:
                chapter 13. millennium challenge account

SECTION 1. STATEMENT OF POLICY.

    (a) Congress finds that--
          (1) it is in the interest of the United States to support a 
        new compact for global development in which increased 
        development assistance is provided to those developing 
        countries which have demonstrated a commitment to ruling 
        justly, investing in people, and adopting economic reforms and 
        policies that make development effective;
          (2) such a compact should have as its objective, as a shared 
        responsibility between developed and developing countries, the 
        achievement of the goals of the United Nations Millennium 
        Declaration; and
          (3) in order to maximize the effectiveness of such a compact, 
        the United States should ensure coherence of economic and trade 
        policies with such goals, including the external debt of 
        recipient countries.

SEC. 2. ELIGIBLE COUNTRIES.

    (a) A country shall be eligible for assistance under this chapter 
if the President has determined, in accordance with section (1) that--
          (1) the country is eligible to borrow from the International 
        Development Association.
          (2) its government has demonstrated a commitment to democracy 
        and good governance through promoting the human rights of all 
        its people, protecting freedom of association, safeguarding an 
        independent judiciary and media, concerted efforts to combat 
        corruption, transparent budget decision making, and by 
        involving citizens, particularly women, and other 
        disenfranchised segments of society, in the process of making 
        and administering public policy.
          (3) its government has demonstrated a commitment to investing 
        in the health and education of its people, with careful 
        attention to the needs of women and girls.
          (4) its government has demonstrated a commitment to economic 
        policies that foster sustainable development, poverty 
        reduction, and equitable growth; and that give special weight 
        to promoting economic opportunities for the rural and urban 
        poor--particularly women--to participate in the market economy.
          (5) the country is working, in consultation with the 
        International Labor Organization, towards eventual compliance 
        with core labor standards. Countries shall not be obliged to 
        privatize essential services or liberalize capital markets 
        unless it can be shown that this will enhance equitable growth 
        and poverty reduction.
          (6) the country has developed a participatory national 
        strategy, such as Poverty Reduction Strategy Papers, for 
        working towards the Millennium Development Goals and otherwise 
        promoting equitable and sustainable development.
    (b) Expanded Eligibility.--A country that is not eligible for 
assistance under the criteria set forth in paragraph (a) of this 
section, may otherwise receive assistance provided under this chapter 
if that country--
          (1) is eligible to borrow from the International Development 
        Association;
          (2) has demonstrated substantial progress towards the 
        criteria set forth in paragraph (a) of this section, 
        particularly criteria pertaining to good governance, 
        accountability and transparency of the budget and investing in 
        people;
          (3) has a comprehensive strategy for addressing a particular 
        Millennium Development Goal and is demonstrating commitment to 
        implementing that strategy; and
          (4) will use such assistance to improve performance on the 
        criteria set forth in paragraph (a) of this section and to help 
        meet the targets it has established in the strategy called for 
        in paragraph (b)(3) of this section.

SEC. 3. IMPLEMENTATION.

    (a) Structure.--
          (1) Governing/policy council.--The President shall establish 
        a structure for the governance and policy guidance of the MCA 
        which involves collaboration among the heads of the U.S. Agency 
        for International Development, the Department of State, and the 
        Department of the Treasury. These agencies shall ensure 
        coordination with other U.S. government agencies.
          (2) Administration.--The MCA shall be administered by a 
        semiautonomous office located in the United States Agency for 
        International Development. That office shall be structured to 
        maximize efficiency, innovation, and responsiveness to partner 
        countries and organizations, to provide appropriate technical 
        and managerial assistance, and to coordinate with other USG 
        agencies and international donors.
          (3) Donor coordination.--MCA activities shall be coordinated 
        with other bilateral and multilateral donor institutions at all 
        stages of implementation, including the review of poverty 
        reduction strategies, proposal submissions, and evaluation of 
        progress. In order to increase complementarity of programs and 
        reduce duplication of efforts for recipient countries, the 
        United States should work with the other donors to develop 
        common approaches to proposal submission, reporting 
        requirements, data collection and evaluations systems, and 
        other processes for the delivery of development assistance.
          (4) Advisory council.--In order to ensure continued input 
        from civil society organizations and transparency of operation, 
        there shall be established an Advisory Council to provide 
        periodic review and advice on the policies and administration 
        of the MCA. This Advisory Council shall be composed of 
        development experts from government and multilateral agencies, 
        academic institutions, non-governmental organizations and other 
        civil society organizations.
    (b) Provision of Assistance.--
          (1) Principles.--The approach and delivery mechanisms adopted 
        under the Millennium Challenge Account shall be based on the 
        overarching principles of local ownership, specifically 
        ensuring the use of locally designed national development 
        strategies, and civil society participation. The support for 
        such national strategies will provide a mechanism for assuring 
        coordination with other bilateral and multilateral donors.
          (2) MCA implementation agreement.--Upon a country being 
        determined eligible for MCA assistance and that government 
        indicating a willingness to participate in the program, the USG 
        and that government shall develop an MCA Implementation 
        Agreement to outline the broad areas of collaboration for MCA 
        assistance. Both USG and the recipient government shall have 
        substantial consultations with civil society institutions in 
        the process of developing the MCA Implementation Agreement. 
        This agreement shall be a public document and shall serve as 
        the guide for the submission and evaluation of proposals for 
        funding by both government and civil society institutions.
                  (A) The MCA Implementation Agreement shall be derived 
                from the country's participatory national development 
                strategy, such as the PRSP, and shall therefore require 
                a joint review of that strategy. This review shall 
                identify areas of desired collaboration, particularly 
                those elements of the country's national development 
                plan for which MCA assistance will be available and 
                shall identify--broadly and not exclusively--the 
                appropriate roles and responsibilities of government 
                and civil society institutions.
                  (B) The joint review shall identify the strengths and 
                weaknesses of the national strategy in the areas to be 
                funded by the MCA--assessing both the process and the 
                content the strategy--and identify areas for 
                improvement. Particular attention should be focused on 
                the participation of civil society in the development 
                of the strategy and the differences in development 
                opportunities for men and women likely to result from 
                the achievement of goals set forth in the strategy. 
                Technical assistance and funding under the MCA shall be 
                made available for addressing particular weaknesses and 
                other such purposes related to the strategy.
    (c) Proposals for Funding.--Proposals for funding consistent with 
the MCA Implementation Agreement may be submitted by the eligible 
country government, local civil society organizations, international 
agencies and U.S. private and voluntary organizations in partnership 
with indigenous organizations. Proposals should contain the following 
elements:
          (1) a description of the programs and projects for which 
        assistance is requested;
          (2) specific development goals consistent with the MDGs, 
        targets to be achieved, and measurable indicators of success to 
        determine progress toward these goals;
          (3) a clear indication of the contribution towards and 
        consistency with the MCA Implementation Agreement of the 
        recipient country;
          (4) identification of the key stakeholders and how they will 
        be involved; and
          (5) mechanisms for mid-course corrections.

SEC. 4. REPORTING REQUIREMENTS.

    (a) Comprehensive Strategy.--Not later than 12 months after the 
date of enactment the President shall submit to the appropriate 
congressional committees a comprehensive U.S. strategy, with 
benchmarks, timetables, and necessary resource requirements for 
achieving the Millennium Development Goals, through programs of 
assistance, trade and economic policies, debt relief, and private 
investment flows.
    (b) Annual Report to the Congress.--Not later than December 31 of 
each year, the President shall prepare and transmit to the appropriate 
congressional committees a report, which shall be made available to the 
public, concerning assistance provided to each country under this 
chapter for the prior fiscal year. Such report shall contain--
          (1) the amounts of assistance provided to each country under 
        this Act;
          (2) for each country, the specific goals and objectives of 
        such assistance;
    (c) Additional Report to the Congress.--In every third consecutive 
year during which a country receives assistance under this chapter, the 
report in paragraph (b) of this section shall also contain for such 
country--
          (1) progress made toward reaching the goals and objectives 
        set forth in paragraph (b) of this section, including data 
        disaggregated by sex, age, and income;
          (2) in cases where progress towards reaching these goals and 
        objectives was hampered by any exogenous shocks to the 
        country's economic, political or social climate, a description 
        of such shocks and their impact on the country's progress 
        towards reaching the goals and objectives set forth in 
        paragraph (b) of this section;
          (3) a description of the role of civil society institutions 
        in developing and in achieving the goals and objectives set 
        forth in paragraph (b) of this section;
          (4) an overall assessment of progress made toward reaching 
        the Millennium Development Goals, including data disaggregated 
        by sex, age, and income;
          (5) efforts towards donor coordination;
          (6) the extent to which there is coherence of economic and 
        trade policies of the United States with the goals and 
        objectives set forth in paragraph (b) of this section.

SEC. 5. AUTHORIZATION OF APPROPRIATIONS.

    (a) There are authorized to be appropriated to the President to 
carry out the purposes of this chapter, in addition to funds otherwise 
available for such purposes, $1,666,700,000 for FY 2004, $3,333,300,000 
for PY 2005, and $5,000,000,000 for each of the years FY 2006, FY2007 
and FY2008, to remain available until expended.
          (1) Terms of assistance.--Assistance provided under this 
        chapter--
                  (A) shall be in the form of grants and shall not be 
                repayable, even if provided through multilateral 
                institutions;
                  (B) shall be made available notwithstanding any other 
                provision of law;
                  (C) shall be coordinated with other donors utilizing 
                the PRSP and or other national coordinating mechanisms 
                such as national education plans and country 
                coordinating mechanisms of the Global Fund for HIV/
                AIDS, TB and Malaria, as applicable and to the extent 
                possible, in order to avoid duplication of efforts or 
                contradictory requirements to effectively reach the 
                MDGs; and
                  (D) may not be used for any military or paramilitary 
                purposes.
          (2) Limitation.--No assistance authorized by this chapter 
        shall be provided to--
                  (A) any country that is otherwise ineligible to 
                receive economic assistance under the following 
                provisions of the Foreign Assistance Act of 1961--
                          (i) section 116 (relating to human rights);
                          (ii) section 490 (relating to major illicit 
                        drug producing and drug transit countries); and
                          (iii) section 620A (relating to governments 
                        supporting international terrorism.
                  (B) any country whose duly elected head of government 
                is deposed by decree or military coup, until such time 
                as the President determines and certifies to Congress 
                that a democratically elected government has taken 
                office in that country.
          (3) Administration expenses.--Of the amounts appropriated 
        each year and made available to carry out the purposes of this 
        chapter, not more than __ percent of such amount may be used 
        for administrative expenses of the United States government 
        agencies administering programs under this chapter.

SEC. 6. SPECIAL AUTHORITIES.

    In addition to the other uses of assistance authorized under this 
chapter, assistance is authorized to be provided for--
          (a) Technical assistance to mca eligible countries.--
        Technical assistance may be provided to eligible countries 
        for--
                  (1) addressing weaknesses in its national development 
                plan and in developing proposals pursuant to section 
                3(b)(2) of this chapter; and
                  (2) improving the capacity to monitor programs, 
                collect and analyze data, and evaluate program 
                effectiveness, particularly for strengthening the 
                capacity to collect and analyze data disaggregated by 
                sex, age and income.
          (b) Debt relief for mca recipient countries.--
                  (1) Authority.--For all countries receiving 
                assistance under this chapter, the President is 
                authorized and encouraged to cancel all amounts owed to 
                the United States as a result of loans made or credits 
                extended prior to January 1, 2003, under any of the 
                provisions of law specified in subsection (A) of this 
                section.
                          (A) Provisions of law.--The provisions of law 
                        referred to in subsection are the following:
                                  (i) Sections 221 and 222 of the 
                                Foreign Assistance Act.
                                  (ii) The Arms Export Control Act (22 
                                U.S.C. 2751 et seq.)
                                  (iii) Section 5(f) of the Commodity 
                                Credit Corporation Charter Act, Section 
                                201 of the Agricultural Trade Act of 
                                1978 (7 U.S.C. 5621), or Section 202 of 
                                such Act (7 U.S.C. 5622), or 
                                predecessor provisions under the Food 
                                for Peace Act of 1966.
                                  (iv) Title I of the Agricultural 
                                Trade Development and Assistance Act of 
                                1954 (7 U.S.C. 1701 et seq.).
                          (B) Other debt reduction authorities.--The 
                        authority provided in this section is in 
                        addition to any other debt relief authority and 
                        does not in any way limit such other authority.
                  (2) Limitation.--A country that is eligible to 
                receive cancellation of debt under this section may 
                receive such cancellation only if the country has 
                agreed--
                          (A) to direct the financial benefits of debt 
                        cancellation to programs to meet the goals and 
                        objectives set forth in the MCA Implementation 
                        Agreement pursuant to section 3(b)(2) of this 
                        chapter; and
                          (B) to ensure that the financial benefits of 
                        debt cancellation are in addition to the 
                        government's total spending on poverty 
                        reduction for the previous year or the average 
                        total of such expenditures for the previous 3 
                        years, whichever is greater.

SEC. 7. GENERAL PROVISIONS.

    (a) Definitions.--
          (1) For the purposes of this chapter, the term ``Millennium 
        Development Goals'' or ``MDGs'' shall refer to the 
        internationally-agreed goals set forth in Section 102(c) of the 
        Foreign Assistance Act of 1961 as amended by this Act;
          (2) For the purposes of this chapter, the term ``appropriate 
        congressional committees'' means the Committee on 
        Appropriations and the Committee on Foreign Relations of the 
        Senate, and the Committee on Appropriations and the Committee 
        on International Relations of the House of Representatives.

SEC. 104. RELATION TO OTHER DEVELOPMENT ASSISTANCE.

    Sec. 102 of the Foreign Assistance Act of 1961 is amended as 
follows, strike section (c) and insert:
    (c) U.S. development assistance policies and programs shall be 
utilized in support of achievement of the Millennium Development Goals:
          (1) Eradicate extreme poverty and hunger;
          (2) Achieve universal primary education;
          (3) Promote gender equality and empower women;
          (4) Reduce child mortality;
          (5) Improve maternal health;
          (6) Combat HIV/AIDS, malaria, and other diseases;
          (7) Ensure environmental sustainability; and
          (8) Develop a global partnership for development.
    (d) To carry out the policies set forth in this section, the U.S. 
government shall provide assistance to governments and organizations in 
the form of policy advice, technical and project assistance, financial 
assistance, debt relief, and commodities:
          (1) Development assistance shall be provided to governments 
        and organizations to alleviate poverty and hunger, to enable 
        people and communities to build the capacity to develop 
        economically, socially, and politically, and to strengthen the 
        capacity and commitment of government to govern justly and 
        wisely.
          (2) Within development assistance, a Millennium Challenge 
        Account shall be created to provide assistance to help 
        implement indigenously designed national development plans for 
        countries which demonstrate a strong commitment to, and are 
        taking concrete steps toward, good governance, open economic 
        systems, and investing in their citizens.

    The Chairman. Dr. Berresford.

STATEMENT OF SUSAN BERRESFORD, PRESIDENT, FORD FOUNDATION, NEW 
                         YORK CITY, NY

    Ms. Berresford. Good morning. It is a great honor to be 
here today and a personal pleasure, I would say, Mr. Chairman, 
to be here before you, knowing of your enthusiasm for the Ford 
Foundation's International Fellowship Program and your 
assistance with that.
    The MCA is a very welcome initiative from the 
administration. It is bringing substantial new resources and 
new ideas to the development field.
    I will focus primarily on ways that the Ford Foundation's 
international development assistance experience may contribute 
to your thinking about the structure and operation of the new 
Millennium Challenge Corporation.
    Ford is a private foundation with more than 50 years of 
work internationally in development in this country and 
overseas. In that period we have provided more than $12 billion 
in grants and loans, about 40 percent of that overseas. And 
while $12 billion is a lot of money and a big number, it is 
very small in relation to the development need.
    And so we have thought of ourselves, really, as an R&D 
donor, or a venture philanthropist, testing new ideas, trying 
to bring them to scale, building new kinds of institutions, and 
trying to amplify the voice and contributions of talented 
people who would otherwise be marginalized in their societies.
    We are headquartered in New York City, and we currently 
have 13 offices in Africa, Asia, Latin America, and Russia. We 
work in 35 countries through these offices, and about 46 
percent of our spending in program goes overseas.
    You have asked me to testify specifically on such issues as 
the optimal ratio of funding levels to staff, the ideal 
composition of a foundation board, and the advantages and 
disadvantages of field offices. And while the Ford Foundation's 
structure and scale is quite different from that that is being 
proposed here, I think there are some principles that perhaps I 
can offer. And I have four to offer today that may be useful in 
thinking about the new corporation.
    Principle No. 1 is to work close to the ground through in-
country offices. We believe strongly at the Ford Foundation 
that our offices overseas make us particularly effective in 
supporting development on the ground--and it is on the ground 
where development really occurs.
    In-country offices allow us to be genuine partners with the 
development players who are working doing the hard daily work. 
They give us a local credibility, a seat at the table with 
people who are wrestling with the serious problems of 
development. They give us a full and nuanced sense of country 
and culture and context. And they allow us to understand how 
things really are working as they are rolling out on the ground 
through grants and loans.
    They help us also make well informed decisions about 
initial funding, understanding the difference between something 
that looks good on paper but in reality is not quite so 
promising, or even vice versa.
    And they give us the very critical ability--and we have 
heard a lot about this this morning--to ensure very strong 
evaluation and monitoring that gets at what is really 
happening.
    I think the MCC needs these capabilities very clearly, and 
I do not think there is any other way to get them than having 
some kind of presence on the ground.
    And, of course, there is a disadvantage to having a 
presence on the ground, it costs more money than staying in one 
place outside. We have accepted that increased cost because we 
believe it so greatly increases our effectiveness. And in our 
experience and our scale of operation, an overseas office 
brings an additional 15 percent cost to the amount of money 
that you are moving into a country.
    Principle No. 2, invest in staff with diverse 
qualifications and give them significant authority and 
flexibility. And this is really a corollary of the first point.
    Our board gives the president of the Ford Foundation 
authority to approve all grants and loans, after substantive 
discussion with the board about the aims of the programs that 
we undertake, the means that we are likely to take, our 
strategies, the amount of money, and how we are going to be 
measuring progress.
    With the board's approval, I delegate further down to the 
overseas offices very significant authority to make decisions. 
This helps us not get bogged down in bureaucracy and very time-
consuming endless processes.
    Obviously, our staff regularly report back to the board on 
progress and how things are going. And we require regular 
reports from our grantees.
    For decentralization of this kind to be effective, we 
require seasoned people who can handle this degree of authority 
and responsibility, and a very streamlined approval process. We 
recruit staff with excellent academic and know-how, knowledge 
of in-country context, and language.
    They are economists, lawyers, doctors, social scientists, 
NGO leaders--a diversity that we have found very fruitful to 
development work, because you need to bring so many different 
kinds of players into the development process. Thirty percent 
of our staff are drawn from the countries in which we work.
    And I might note, similar to the proposed Millennium 
Challenge Corporation, our grant makers work on fixed term 
contracts, generally 3-year contracts. We hope they stay for 
two contracts in their overseas assignments, so a total of 6 
years.
    Now, the ratios. Across the foundation, we have 125 
grantmakers, 65 of whom work overseas, outside the United 
States. On average, each of these grantmakers handles a grant 
budget of about $3 million a year. That could rise to $5 
million perfectly easily.
    And because our grants are for multiple years, grantmakers 
typically manage an active portfolio of about $7.5 million. We 
expect our grantmakers to be active in the work that they are 
doing, to be visiting grantees regularly, to be convening 
meetings of people doing like work in other parts of the world 
or in the region so that our grantees are exposed to the very 
best thinking that is available. And we expect our staff to 
help them muster the kind of professional expertise they would 
need to solve problems that emerge.
    Reflecting on this, in Ford's experience and even allowing 
for the differences in scale that I referred to earlier, I find 
the proposed MCC staff total of 100 persons surprisingly small 
for an entity that is likely to be spending $1.3 and up to $5 
billion a year. So I think that may need some further thought.
    The third principle is that we should all be aiming to 
build local development capacity in all three sectors over the 
long term. The responsibility for national development lies 
with a country's own people and institutions. And every 
development donor ought to be engaging very directly with the 
people and institutions in all three sectors--government, 
business and non-profits--and I think particularly with the 
nonprofit, voluntary sector now, which has become such a 
flourishing force for good and for development in many 
countries in which we work.
    The plans for the MCC seem sharply focused on the 
government--as they are now written--as the primary development 
leader and contractor. And certainly, government has a lead 
responsibility. But innovation and effectiveness also is found 
outside of government, for example, in the NGO community.
    And, therefore, it seems to me it might sense for the MCC 
to state clearly its aims and objectives in a country and then 
have an open competition where members of all sectors might 
apply and bring forward their best ideas, and some may even 
come in combinations across sector.
    No single sector has a monopoly on good ideas and, in fact, 
some of the most innovative development advances have come from 
cross-sectoral combinations.
    And I do not have this in my written testimony, Mr. 
Chairman, but I also would observe that in many countries in 
which MCC is likely to operate, the relationship between 
governments and NGOs is not entirely settled and not always 
totally comfortable. And so I am not convinced that relying 
entirely on government as the key contractor would bring forth 
the very best of NGO participation.
    I would make a related point about evaluation and 
monitoring. In many countries in which the Ford Foundation 
works, there have been built up over the last decade or two 
very significant capacities in country universities, in think 
tanks and policy analysis groups that can do very sophisticated 
monitoring and tracking and evaluation of programs, national 
and local.
    I think the MCA has an opportunity to build on this and 
strengthen these capacities, and at the end of the day, it is 
these local analysts of development and progress that need to 
be very strong in every country. And so it seems to me as the 
proposal now reads, it may be overly dependent on evaluation 
from outside the country, and perhaps more emphasis could be 
given to engaging the analytic capacities that are there within 
region or within country.
    The last principle I would stress is that it is important 
to get guidance from a diverse and active board. The Ford 
Foundation's trustees have always included corporate CEOs, 
former elected and appointed government officials, and NGO and 
civic leaders. They come from the U.S. and they come from 
overseas. We need that diversity because of the variety of 
sectors in which we work in the development process.
    They also help us with donor coordination and 
collaboration, and that is obviously a challenge in this new 
entity as well.
    Most important is that our trustees are outsiders, in a 
sense, to the Ford Foundation. They come in from the outside. 
And they bring us the most up-to-date knowledge of activity in 
each of their spheres, and they challenge our assumptions and 
our ideas. And that is very important in an institution that is 
involved in the hard daily grind of development work.
    The board for the new entity for MCA will obviously reflect 
the fact that it is a program of government assistance. But I 
think it is worthwhile for the Congress to consider ways to 
draw upon the strengths of individuals beyond the public sector 
and perhaps even drawing people from some of the countries that 
are likely to be involved in the programs.
    Finally, I would say that MCA has a very laudable goal of 
making assistance for development more transparent and less 
subject to political pressure than it has been in the past. 
That is a challenge both in perception and in practice.
    And I think an active and diverse board with outsiders 
could be an asset to the new entity in bringing this special 
kind of credibility.
    That concludes my testimony, Mr. Chairman. I would be happy 
to answer questions.
    The Chairman. Thank you very much, Ms. Berresford.
    [The prepared statement of Ms. Berresford follows:]

 Prepared Statement of Susan V. Berresford, President, Ford Foundation

    Good morning. I am Susan Berresford, President of the Ford 
Foundation. It is an honor to testify before this committee on the 
Millennium Challenge Account and the proposed Millennium Challenge 
Corporation. I might say, Mr. Chairman, that it is a personal pleasure 
to be here, knowing of your support for the Ford Foundation's new 10-
year International Fellowship Program and your long and distinguished 
record of leadership on critical issues in U.S. foreign policy.
    The MCA is a very welcome initiative from the Administration. It 
holds the promise of bringing substantial new resources to U.S. foreign 
assistance for development. It also has the potential more fully to 
express our country's responsibilities--and our values--to help those 
least favored in our world. Equally important, MCA shows fresh thinking 
both about how development occurs and how this country might better 
assist others in their own efforts. Development is a large, 
multidimensional process. This is wisely recognized in the 
legislation's focus on just and democratic governance, economic 
freedom, and investment in people. Development must draw upon and 
energize the full range of a country's people and institutions. That is 
the Ford Foundation's experience and, I believe, reflects the best 
thinking in this field.
    At this point the new entity that will oversee and administer the 
MCA is still to be structured and fleshed out. Of utmost importance is 
clarifying the MCA's relationship to other existing agencies of 
official foreign assistance, perhaps most fundamentally USAID. Since I 
believe others are commenting on this crucial point, I will focus 
primarily on ways that the Ford Foundation's international development 
experience may contribute to your thinking about the structure and 
operation of the Millennium Challenge Corporation.
    The Ford Foundation is a private foundation with more than 50 years 
of work internationally and in the U.S. In that period we have provided 
more than $12 billion in grants and loans, about 40% of that abroad. 
Those are significant dollars but only a small part of the total 
resources needed for development. Recognizing the limitations of this 
scale of funding, we have tried to function as an ``R & D'' donor--
using our resources to test new ideas and help bring them to scale, to 
establish new kinds of organizations, and to amplify the voice and 
contributions of talented people who would otherwise be marginalized. 
We seek to be a resource for innovative people and institutions 
strengthening democratic values, reducing poverty and injustice, 
promoting international cooperation, and advancing human achievement.
    A fundamental challenge facing every society is to create 
political, economic and social systems that promote peace, human 
welfare and the sustainability of the environment on which our lives 
depend. We believe that the best way to meet this challenge is to 
encourage initiative by those living and working closest to where 
problems are located; to promote collaboration among the nonprofit, 
government and business sectors; and to ensure participation by men and 
women from diverse communities and at all levels of society. In our 
experience, those activities help build common understanding, enhance 
excellence, and enable people to improve their lives and communities.
    The Foundation is headquartered in New York City, and we currently 
have 13 offices in Asia, Africa, Latin America and Russia. Through this 
network, we support work in some 35 countries. About 46% of our current 
program budget is spent on international development.
    In your letter inviting me to testify, Mr. Chairman, you asked that 
I focus my comments on the obstacles that the new Millennium Challenge 
Corporation may run up against. You mentioned such issues as the 
optimal ratio of funding levels to staff, the ideal composition of the 
foundation board, and the advantages and disadvantages of field 
offices. As you noted in your letter, the MCA does have some 
similarities to foundations such as Ford in its character and purpose. 
There are also obvious differences. For starters, the scope of MCA--a 
contemplated $5 billion annual spending level by its third year of 
operation--dwarfs even the largest private philanthropies. And as an 
initiative of the United States government, it will operate somewhat 
differently from an independent, private foundation.
    But there may be principles of operation from Ford's experience 
that would be helpful guideposts for MCA. I will try to put four of 
these before you for this committee's consideration.
    (1) Work close to the ground through in-country offices. We believe 
strongly that our structure of overseas offices makes Ford particularly 
effective in supporting development on the ground--which is where it 
has to take place. In-country offices allow us to operate as genuine 
partners--building relationships of mutual knowledge and respect with 
people and institutions in country. They give us local credibility--a 
``seat at the table'' with others who are tackling tough issues in 
development. They allow a full and nuanced sense of context and 
culture, of how things really work and how they are evolving as the 
grants and loans play out. Moreover, since we are local, we can respond 
quickly to new opportunities and unforeseen difficulties that are hard 
to see from farther away. They help us make well-informed initial 
decisions about funding--the difference between a project that looks 
wonderful on paper but less promising on the ground or vice versa--and 
they are critical to our ability to ensure reliable monitoring and 
evaluation. The MCC needs these capacities that are nearly impossible 
to obtain any other way.
    Of course, maintaining overseas offices has a cost, and that is 
something we have accepted in order to increase effectiveness. In our 
experience, at our scale of operation, an overseas office brings an 
additional cost of 15% of the funds spent overseas.
    (2) Invest in staff with diverse qualifications and give them 
significant authority and flexibility. This follows on very closely 
from Ford's commitment to working close to the ground in an R&D mode. 
Our board gives the president authority to approve all grants and 
loans, after substantive discussion between the board and staff about 
the aims, strategies and funds we expect to employ, and how we will 
measure progress. And with the board's approval, the President further 
delegates much grantmaking authority to heads of overseas offices. This 
is to avoid decisions being bogged down in endless process and 
bureaucracy. Staff regularly report back to our board on how the work 
is going. We also require regular reports from grantees and have normal 
accounting and other controls.
    For such decentralization to be effective, Ford needs seasoned 
people able to handle that authority and a fairly streamlined approval 
process. With this in mind, we recruit an overseas staff with excellent 
technical and academic skills, knowledge of the country context, and 
local languages. They have a range of professional backgrounds--they 
are economists, lawyers, MBAs, social scientists, NGO leaders--a 
diversity that we have found contributes to fruitful thinking across 
the different dimensions of development. Many are drawn from the 
countries or regions where they are working--30% of our program staff, 
currently--bringing perspectives that help us formulate more informed 
judgments and strategies. We look for people able to interact 
effectively with local men and women at all levels, and with experience 
in complex organizations. I might note that all our program staff 
operate on 3 year contracts. They typically spend about 6 years with 
the foundation. We benefit enormously from fresh thinking that new 
staff members bring to our different programs.
    Across the foundation we have 125 grantmakers, 65 of whom work 
outside the U.S. On average each overseas staffer now makes grants 
totaling $3 million per year. If our assets grow, these totals could 
increase to $5 million. As most of our grants are for two to four 
years, each staff person manages a portfolio of old and new grants 
totaling about $7.5 million. Portfolio management includes visiting 
grantees, helping grantees to muster useful expertise, and convening 
worldwide and national meetings to exchange ideas with people doing 
similar work. In each overseas office, in addition to grantmakers, we 
also have accountants, and normal office staffing to help ensure 
compliance with relevant laws and adherence with good practice.
    Reflecting on our experience and even allowing for differences in 
operating style and purpose, I find the proposed MCC staff total of 100 
persons (covering grantors, back office and other functions) 
surprisingly small for the $1.3 to $5 billion spending levels 
contemplated in the first years.
    (3) Aim to build local development capacity in all three sectors 
over the long term. The responsibility for national development lies 
with a country's own people and institutions. Thus, development donors 
should engage with a country in ways that build individual and 
institutional capacities in all three sectors--government, business and 
non-profits. Although Ford is an R&D donor and does not fund ``country 
plans'' as such, we do have experience with all three sectors. Our way 
of working with each of them has varied in different times and country 
settings, depending on where we see ideas, energy, and need. Sometimes 
we have focused primarily on working with government agencies and 
infrastructural institutions, sometimes with business, other times with 
NGOs and civil society. Local and national NGOs have become a 
flourishing force for development in many of the countries in which we 
work. We devote significant resources to helping build their capacity, 
in addition to working with U.S.-based international NGOs.
    Plans for the MCA seem sharply focused on the government as the 
primary development leader and contractor. Certainly, government has a 
lead responsibility but innovation and effectiveness are also often 
found outside of government, for example in a country's NGO community. 
It may make sense for the MCA to state clearly its aims and objectives 
in a country and then have an open competition that allows all sectors 
to bring forth their best proposals, and some to apply in cross-
sectoral combinations. No single sector has a monopoly of good ideas, 
and often the most fruitful development innovation involves combining 
the capacities of at least two of the three sectors.
    I would make a related point about evaluation and monitoring. In 
many countries in which the Ford Foundation works, universities and 
policy analysis groups have been building capacity for evaluation and 
tracking of national and local programs. Some NGOs have also built very 
sophisticated systems for monitoring and analyzing their work and that 
of counterparts. In the long term, these independent analytic resources 
are essential to ongoing development. The MCA has an opportunity to 
utilize and further strengthen them. As it currently reads, the MCA 
proposal seems overly dependent on evaluation from outside, presumably 
from U.S. based institutions. Each MCA grantee could be encouraged to 
include in its proposal a full plan for evaluation and monitoring, 
utilizing its choice of independent institutions that meet certain 
specifications and qualifications. MCA could still have its own 
overview review process, but it can augment this with the observations 
and analysis of professional people close to the ground and familiar 
with the operating realities.
    (4) Get guidance from a diverse and active board. The Ford 
Foundation has an independent board drawn from all three sectors with 
which we work. Our trustees have always included corporate CEOs, former 
elected and appointed government officials, NGO and civic leaders. They 
come from the U.S. and from countries around the world. We need that 
diversity because our program strategies involve civil society, 
government and business and encompass a wide range of fields related to 
social change and development. Our trustees are particularly valuable 
in bringing us the most up to date experience of individuals who are 
active in their different spheres. They view our work with ``outside'' 
perspectives, and they challenge our ideas and our assumptions--playing 
a very useful role in an institution deeply engaged in daily realities 
of development. Our trustees devote approximately 15 days to the 
foundation every year--in three two-day meetings in New York, in a 
field visit of 3-7 days to look at our programs and initiatives in the 
U.S. and abroad, and in various consultations and preparation.
    The board for the new entity for the MCA will obviously reflect the 
fact that MCA is a program of government assistance. But it is 
worthwhile for the Congress to consider ways it could draw upon the 
strengths of individuals beyond the public sector. MCA is not a 
conventional government-to-government aid program. It will support 
development involving a variety of organizations from civil society and 
from the private sector. It would benefit from guidance from a board 
whose members were active in those different spheres, which have 
complementary contributions to make to overall development. And it 
would be stronger if it included active participation of individuals 
from countries in the developing world itself
    The MCA has a laudable goal of making assistance for development 
more transparent and objectively-based--and less subject to political 
pressures familiar in past programs. That is a challenge in both 
perception and practice. An active, diverse board could be an asset to 
the new entity in establishing its credibility as a fresh approach to 
U.S. developmental assistance. Even more important, such a board could 
also give MCA the kind of guidance it will need if it is to be a 
pioneer and respond to and support the full range of ideas and energies 
that go into genuine and lasting development.
    Mr. Chairman, that concludes my testimony. I would be happy to 
respond to any questions the Committee may have.

    The Chairman. Let me start the questioning, and we will set 
a time limit of 10 minutes each round, and then I will call on 
Senator Nelson for brief comments and discussion.
    First of all I want to test out the indicators. Dr. 
Radelet, I think there is merit in your suggestion that the 
indicators have an absolute aspect. If they are constantly 
shifting around medians by definition--and one of our questions 
earlier was trying to get at this, I suppose--half or above or 
half or below, ultimately the qualities that are being sought 
by our government as I understand this may become more diffuse.
    Of course, it could be everybody that rises and you would 
say then that some of the early winners drop off the charts 
somewhere midway in their development program.
    But in the case, for instance, of governmental corruption, 
how do you get absolute indicators? Do you say either you have 
a government that is not corrupt or one that is? In a way, this 
almost invites a relative standard.
    Some governments appear to be more corrupt and others less 
so. Some of the indicators, obviously, and some you suggested, 
permit a more statistical precision, but what do you advise as 
we get into the indicator business?
    Dr. Radelet. I think that several of the indicators can be 
moved into absolute scales immediately--immunization rates, 
expenditure on education and health, and primary completion 
rate, several other things--obviously inflation, budget 
deficits. But there are several corruption rules of law and 
others that are much subjective as they are measured now, and 
those could not be moved to an absolute standard right away.
    There are some research efforts underway to investigate 
ways that those indices could be made more objective, to look 
at court cases, to look at payoffs and bribes, to look at 
various other indicators of corruption, to look at court cases 
and those kinds of things. But those are, I think, in their 
infancy, and it will take several years to develop those.
    Hopefully, this program will support efforts to improve the 
range of indicators, not just in terms of subjectivity, 
objectivity, but also to incorporate other kinds of things that 
we might like to look at that--where data are not there yet.
    So there are these efforts that are underway to begin to 
make these more objective indicators and we should--we should 
be supporting that. But you cannot move to complete objective 
indicators right away.
    The Chairman. I understand your testimony is that the 
indicators ought not to be in the legislation, even though 16 
have been identified. Now you are suggesting maybe additional 
ones should be added--that this should be at the discretion, 
perhaps, of this board, that it keeps thinking through the 
program and what the objectives of our government are, vis-a-
vis other governments. Therefore the board has the flexibility 
to add and subtract here without appearing to be arbitrary so 
that the nations involved at least feel the competition is 
fair, that we are not changing the goal posts.
    Dr. Radelet. Well, I think that is right. I think there are 
ways to improve it. And I think the ways to hold the 
administration accountable are to make sure that it is 
transparent, open and public, so that people can test those so 
that there is a clear relationship to poverty reduction, to 
economic growth, and to other development goals. And as I said, 
that they report regularly to you as to the rationale behind 
any changes in the selection process that they use.
    The Chairman. I wanted to touch on--all three of you have 
touched upon this very important issue of the fact that the 
proposal that we have now really relies very much upon 
government to government relations. In other words, the thought 
is that governments are responsible to be clean and not 
corrupt, and governments are responsible for educational 
standards and various other things.
    But as you are all pointing out, there--from your 
experience, NGO's and businesses--to name two entities--within 
the decisionmaking process in a country are often very 
important in terms of development. And it is not clear, at 
least as I look at the draft legislation, how that is 
contemplated currently. And so this is something that probably 
requires some thoughtful integration in our own thinking here.
    However, some of you have pointed out that NGOs may 
sometimes be at variance with the governments. And, therefore, 
relying upon the government to dispense the funds is a friction 
situation to begin with, or vice versa, sending money directly 
to the NGO.
    Now, you point out, Ms. Berresford, from your work with the 
Ford Foundation, in order to get the NGO situation there 
active, you have a lot of offices on the ground, you have a lot 
of people on the ground. You stressed your on-the-ground 
business in many ways.
    Obviously the spartan proposal that has been presented 
today of 100 employees does not contemplate very many people on 
the ground.
    Now, as we heard in the previous discussion, USAID, as I 
suspect, is supposed to provide most of the people that are on 
the ground, although that requires a lot of thinking through as 
to how they do that, how the governance works.
    What I perceive is that the administration faces a problem 
with regard to perception, a public relations problem on 
foreign aid. Namely, for a long time people have had an adverse 
view of it. This is one reason it does not grow very much; in 
fact, it has been contracting in most terms of the humanitarian 
or economic development character.
    So to resurrect the idea, a new idea of criteria of 
countries that do good things, namely for children, for women, 
to combat corruption and so forth, we need a mechanism to 
determine who are going to be the winners. We need to establish 
incentives, so that then we celebrate countries that are 
successful and becoming more successful through our assistance, 
countries which already have been very poor by the criteria of 
$1,400 and some or less, but which have a chance to make a big 
difference.
    Now, in doing that, however, the administration also knows 
from a public relations standpoint that creating another 
bureaucracy has some down sides, namely, that people feel that 
governmental bureaucracies are too big, that we already have 
several, and that we are about to create another one.
    So they have tried very hard not to create another one. The 
100 people probably stay here in Washington, looking at the 
criteria, measuring the countries, making decisions on policy. 
Whereas somebody else is still in the field. Once again, who 
and how do they relate?
    In our hearing the other day on world hunger, we had 
testimony from knowledgeable people from the NGO community that 
most of the effective work was--hunger or the HIV/AIDS question 
which intersects in the African countries in particular--has 
come from on-the-ground work from very skillful NGOs. This is 
not a settled question as to how people can be effective in any 
country, even if the country has a fairly effective government 
and it meets this criteria.
    And the actual measurement of the results in terms of 
malnutrition or HIV/AIDS seems to be much more complex as to 
how people come into the programs and interact. So that implies 
a lot of people, and this is the reason I am raising the 
question of you. We raised it of the others and we will raise 
it some more, because the administration has a draft bill which 
we will either accept or have to modify in working with our 
House colleagues.
    So it is important that this get started right, the 
governance structure. I am still sort of groping. If you were 
to pick up things where they are now, should we be managing 
this through USAID, or is that politically impossible?
    People say that USAID simply does not have the popularity, 
the credibility, or whatever. It has sort of lost its luster. 
Even though we need all the manpower, all the foot soldiers 
that are there, we need something else to be the spear carrier 
of this. How do we do that?
    I will ask each of you to make some further comments. You 
have already been generous in your testimony, but I have tried 
to draw a finer point, if I could.
    Dr. Berresford, would you testify?
    Ms. Berresford. I think--the first point I would make is 
that the public perception problem will be helped, I believe, 
somewhat by having criteria for inclusion and measurement of 
progress and benchmarks and all that.
    But I also think the public perceives some of the 
governmental entities that do development as not being able to 
move fast in responding to new developments or adjusting as 
things go along. And so there is an efficiency question too 
that, I think, that has to be addressed in a public way.
    Our experience working with AID in the various countries in 
which we work is that they have very good on-the-ground 
knowledge. They are very good partners for us. There--they know 
what is going on. They are helpful, thoughtful. So it seems to 
me this question of the relationship of this to AID has to be 
sorted out very clearly, and it is not clear yet.
    If on the other hand, the proposal goes in this other 
direction of creating a separate corporation, something like a 
foundation as is suggested, and does not really coordinate 
closely with or incorporate AID, I do not think you can do it 
on the cheap. I think the mistake would be to think that 
because you put in benchmarks and clear measures and set out 
objectives that you can do this a different way. And that 
really is not the case.
    If you think about development in our country, we try and 
reform our school systems, something that these countries are 
going to be trying to do. There is no magic to doing that. It 
takes time. It takes investments of people. It takes people 
close to the problem to know what is going on.
    Just having contracts and benchmarks does not get you 
there.
    The Chairman. Yes. You are suggesting, in other words, an 
additional 15 percent that you found in your own organization 
was required on top of the grants----
    Ms. Berresford. Right.
    The Chairman [continuing]. To have the on-the-ground, and 
to have the administration----
    Ms. Berresford. And be able to make--understand what is 
going on and then make the convincing case to the public that 
something is actually happening.
    With your indulgence, Senator Nelson, may I ask the other 
two to comment?
    Senator Nelson. Absolutely.
    The Chairman. Thank you.
    Ms. McClymont. Thank you, Senator. With respect to the 
public perception, Senator, we have done some polling recently, 
which suggests to us that, indeed, the American people are very 
concerned about waste and ill spent money. But at the same 
time, they very much support a lot of what the MCA and frankly 
a lot of what USAID--the USAID does in terms of very concrete 
development goals, helping mothers and children, and getting 
clean water, and fighting hunger, and fighting poverty. These 
are very resonant concerns.
    So I hope that with the MCA, it will not only be the 
opportunity to feature another way of doing business, but it 
will also give the opportunity to talk more broadly about the 
importance of this development assistance we give overseas 
through the leadership of the President, and certainly of your 
committee, Senator, and the Congress more broadly.
    With respect to some of your points about civil society and 
NGOs, we believe the administration has alluded to these 
concepts, but we think they need to be more pronounced. We 
suggest that there be an implementation agreement with a 
government indeed, but that that implementation agreement or 
contract, if you will, is put together through full 
consultation with civil society and private sector and others 
so that there is a real voice being given and concern being 
given from those entities.
    This is done, Senator, as you well know, oftentimes in a 
country through the so-called national development strategies, 
which already exist, which may be able to be built upon to get 
to these more specific projects that are needed. And then 
indeed in terms of the implementation, we would offer that this 
broad contract with the government which is put together in 
that fashion then be implemented through specific proposals 
that are consistent with that contracts that are put forward by 
civil society and others.
    And those could be put forward to either USAID or this new 
MCC. So that would give the protection of the national 
government, not necessarily working directly with the civil 
society groups, but that would manifest in another way.
    I guess the final point I would make is that we really do 
believe that given the extensive presence of USAID on the 
ground. And when we looked at the countries that Mr. Radelet 
had actually reviewed, if you were going to use him as an 
example, in virtually all of them there was a USAID office.
    So those entities with all of that experience could be 
working very closely with the national government to get the 
job done rather than creating a whole other presence such as 
the MCC, so we do stress that there are ways to do that.
    And, again, if the Congress does not go with that route, we 
think that still there should be an extensive reliance on USAID 
and a real coherent strategy put together to bring them 
together.
    The Chairman. Thank you very much.
    Dr. Radelet.
    Dr. Radelet. Senator, just a few points. I think it is 
important to have broader participation than just the recipient 
government in terms of coming up with ideas and writing 
proposals that will require more staff and more work, but it 
will also lead to more proposals, more innovative ideas. And, 
yes, there is some tension sometimes between NGOs and 
governments, but sometimes that is a healthy tension. And I 
think it would be a mistake to run everything through the 
government and squash some of the innovation and some of the 
independence from NGOs and other private entities.
    So I think there needs to be a way to open it up to have 
some limited capacity for others to write proposals directly to 
the MCC for funding. The recipient governments could review it 
and comment, but I don't think they should have the authority 
to necessarily reject those kinds of things.
    A second point, I think 100 people is too small to run this 
thing. Yes, we do have the perception of poor aid, but we could 
add to that if we have a new organization that does not have 
the staff to do what it needs to do that is not coordinated 
with our other things that is redundant in some ways. And that 
could actually end up worsening perceptions.
    We need to have enough people to make this work 
effectively. And I really do not see how you can do this with 
100 people once you start thinking about the number of people 
needed to just look at the indicators, to look at what is 
working in other aid agencies, to know what is going on in 
development economics, to be aware of what is going on on the 
ground, to be thinking about the next tier of countries, not to 
mention personnel and finance and staffing and all the other 
kinds of things that you need to make an organization work. So 
I do think that there is a danger that this is too small.
    I do have some concerns about relying on USAID staff on the 
ground, because they would be two separate institutions. And I 
think that could create some problems of communication and some 
rivalries if we have the MCA staff here in Washington relying 
on a separate agency on the ground. So I do think you would 
have to have MCA staff on the ground, but more broadly, I think 
the idea of implementing this program through USAID needs to be 
considered again.
    Ms. McClymont mentioned it in, you could have the criteria, 
you could have the new ways of implementing programs, but it 
could come under the direction of the person who is already 
appointed to be the President's advisor on development 
assistance and therefore coordinated with the other programs on 
the ground.
    I think there are ways that you can take the best features 
of the administration's proposal, but bring it into AID and 
make it separate the way that the Customs Department is 
separate--well, it was separate from Treasury or the IRS was 
separate; that they answer to the same person but they were 
really independent entities that help coordination in the same 
way.
    The Chairman. Thank you very much.
    Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman. Doctor, how are 
your criteria for a selection of a country different from the 
administration's?
    Dr. Radelet. They are the exact same ones. I took their 
procedure, identical procedure, their 16 indicators are all 
public, with one exception actually. Their budget deficit data, 
they use a confidential IMF data source, so I used publicly 
available budget deficit data. But otherwise I followed it to 
the tee and took advantage of their strong proposal to make 
this open and transparent and just use it with data available 
today.
    Now, the data will change. These data are revised 
regularly; and as I mentioned earlier, five of the sixteen 
indicators are going to be revised in the next couple of weeks, 
and so the list will change. So I think there are good reasons 
why the administration has not come out with its list. But my 
procedure is identical to theirs.
    Senator Nelson. What about a country like Mozambique? Would 
it qualify?
    Dr. Radelet. The first time I did this run back in 
December, they did not qualify, but new data on immunization 
has come out in the last couple of months and now they do 
qualify. That was a standard that they had missed before, and 
they make it now. So according to the data available today, by 
my calculations, they would be on the list.
    Senator Nelson. Mr. Chairman, other than straight 
discussion of foreign aid, when we start talking about food aid 
how would this criteria be employed in the qualification of 
someone being eligible for food aid? And I think, you know, of 
the obvious one right now, North Korea, I think 20 years ago 
where the famine was and still is again 20 years later, 
Ethiopia. Only it was a Communist government back then--how 
would that all fit together?
    The Chairman. Well, the administration testified earlier 
that there are broad humanitarian programs. Food, HIV/AIDS were 
named, these will continue on. USAID has a mission--or other 
agencies do--to deal with these.
    This is going to be a very special niche for select 
countries that are doing the right things. That will be an 
extra impetus for economic development, but it will be 
segregated off from broad humanitarian goals.
    Senator Nelson. Thank you.
    The Chairman. Thank you very much, Senator Nelson. Let me 
ask just as a general question, because I--the administration--
I did not get into this, and I am not quite clear as you. And 
they have discussed the fact that some of these programs may 
have several years of duration. A country comes on the list, 
let us say, in this initial listing--and I think as has been 
pointed out--even with 7 percent real growth, using the rule of 
72 or what have you, it takes a long while to double or triple 
whatever you have got.
    Is this program likely to last a long while? In other 
words, as I try to think through the practical aspects that we 
face here in the Congress with programs that have some legs to 
them, we are going to authorize perhaps a new entity here, the 
MCA, and we will have an initial selection round, probably with 
some enthusiasm.
    But each year, as I gather our procedure, the appropriation 
committees will have to appropriate money to fund this if it is 
to go from the $1 billion level to the $5 billion or whatever 
is contemplated. And let us say a country gets started on a 
program that has five or 6 years, maybe even a 10-year span, 
what is the confidence level that we are going to be able to 
give to the recipients?
    Now, this may be beyond your reckoning or mine. Life goes 
on in this democracy. Members come and go, as do 
administrations. But I am just trying to think sort of in 
advance.
    For the Ford Foundation, you have an endowment, and if it 
is well invested, it will not disappear from year to year. It 
is there, and you have a certain amount of money to spend. And 
so does our government really, although the competition for 
resources in appropriation remains in a political society here.
    Have any of you given any thought to this, or have you 
visited with the administration people and raised that question 
outside of this hearing?
    Ms. McClymont. Well, Senator, first of all, I do think it 
is anticipated that the MCA would come into place and be in 
place and that the $5 billion would be present going forward. 
We know how difficult the resources question is.
    I think that it is very important though to underscore that 
although it would be critical to find the resources to do the 
MCA program, to do this important experimentation, it will also 
be important to recognize that we must not diminish the current 
core development assistance programs that are there now.
    Senator Nelson alludes to the food aid question, which, of 
course, would not be really covered by this as you have said. 
So I think it is notable that, for example, in the 2004 request 
that the President has made, in fact, the funding for USAID has 
not been increased. And some of the core development assistance 
accounts, the Child's Survival and Disease accounts have, in 
fact, decreased through the request.
    So I think it is something that we are going to have to 
really watch very closely to ensure that the resources are 
available for both the programs.
    The Chairman. Yes, Dr. Radelet.
    Dr. Radelet. There is a couple of dimensions to your 
question. One is the length of an immediate program or proposal 
or contract as the administration has proposed. The second is 
then the renewal of that contract over a longer period of time.
    On the first issue, the administration is talking about a 
contract length of 3 to 4 years, and they are trying to balance 
that between giving countries enough commitment over several 
years to--and recognizing that programs do take time on the one 
hand. On the other hand, recognizing that things can change as 
well on the ground and that we need every once in a while to 
review. So they are settling into that length of a contract, 
which makes reasonable sense to me.
    Once a country qualifies, they would negotiate a proposal. 
And as long as they meet all the benchmarks along the way, they 
would not need to requalify. As long as they are performing 
along the way and funds can be dispersed over that 3- or 4-year 
period, then they could try to requalify. And as long as they 
are in good standing and things went well, there could be a 
follow-on contract.
    That system generally makes sense to me, but over the 
longer term, the idea that we can have one or two contracts and 
then pull out, I think, would really undermine the objectives 
and lead to greater resentment and really create problems for 
us.
    If we hold this out and promise that if countries do well 
that we will support their efforts to reduce poverty and 
sustain development. And then when countries actually do this, 
if we then begin to cut back funding and reduce it in other 
ways, I think that is going to hurt our credibility and really 
undercut achieving our objectives in the long run.
    So we are making a longer term commitment here if we are 
going to do this and do it well.
    The Chairman. Do you have a comment?
    Ms. Berresford. I would only add that I think the more you 
introduce the use of benchmarks as strict measures, the more 
you introduce a short-term timeframe into the way that people 
think about programs. And we know that development takes a very 
long time, and so success in stage one of meeting a benchmark 
is probably not going to mean success all the way to the finish 
line where a country wants to get with its education system or 
its health system. So that ensuring the future of a long-term 
fund there seems to me very, very important.
    The Chairman. Well, I think so, and this is why I am a 
little concerned about how we start out that trail, recognizing 
under our system of laws that we do not have a way exactly of 
ensuring the continuity of this situation.
    For example, in the humanitarian programs, world famine 
rises and falls, although there are some countries that we know 
have really systemic problems, sometimes of government, quite 
apart from crops and weather.
    Or we are about to get into the HIV/AIDS question in a much 
larger way. The President has made dramatic proposals and most 
optimists about this would say this is a problem that is going 
to be with us for quite a long while. So there are some 
situations that, because they are of a humanitarian character 
or maybe even because of a political relations change--if we 
are giving aid to a country for strategic reasons and suddenly 
the country decides to join some other alliance and jump away 
from us--well, then we have the ability to say, ``OK. Well, 
that is the way it goes.'' I mean, you sort of look at your new 
patron.
    But now here in a business-like way, we are talking about 
criteria, of performance, and suggesting development of a long-
term character for countries that start at a very low level of 
per capita income and have a long way to go any way you look at 
it. This strikes me as a different kind of program than we have 
had before.
    We have been struggling with who administers it on the 
ground and even who governs it here on the board. These are 
important questions. But just the overall concept of this 
thing, how do we phrase this? Do we have a preamble or do we 
have some general ideas that we want to make a part of this 
authorization?
    It seems to me to be very important so that we characterize 
in ways that our successors in this committee or in the Senate, 
what have you, recognize where we started, what our thoughts 
were at the outset. So this is not something we can decide 
among the four of us right now, but I invite your continuing 
thought about this.
    We are in the drafting process of something that may have 
some legs to it if it works, which we pray that it will.
    The idea of the administration coming forward with much 
more aid on top of the things we are doing, I believe, is very 
admirable. And that cannot be guaranteed for any successive 
Congress. But if this works, if, in fact, a lot of countries do 
change many of their habits, they become really better places 
for the people that they serve, that will be remarked upon, 
particularly if you have a good reporting system and sort of 
note all these changes.
    As Senator Biden was pointing out, we have noted these 
remarkable changes in some of our new NATO partners--with 
unresolved issues that went on for decades that were very 
injurious to people have been resolved because these nations 
really wanted to be a part of NATO--and were prepared to settle 
in ways that they would not have--their political systems could 
not have given the fractionalization of coalitions and what 
have you. Suddenly they came together. And that might occur in 
a big way here.
    That is the dramatic aspect of the criteria, of taking them 
seriously, of having them transparent, of broadcasting who does 
what, that more children are getting an education, and more 
women are participating, that disease levels are decreasing. 
These are remarkable things, which could give a lot of impetus 
to this.
    Now, I suppose to the contrary, some nations may say, 
``There you go again, United States. You are far too 
meddlesome. You are reaching into our society and we really 
are--we do not want to play it that way.'' But, I think, to the 
contrary, many countries, as you suggest already, may be 
consulting back home within the cabinet. How do we get up to 
the standard? We can read it on the Web. We sort of see what is 
being looked at.
    These are fairly reasonable standards for freedom-loving 
people trying to expand that.
    Well, I just invite you to continue to work with our 
committee. We appreciate your testimony today and your 
forthcoming responses as always. And this is an important 
issue. All of you have already studied it a lot, which is 
important for the body politic to know. There are people at 
work in your organizations that care about this.
    We certainly do on this committee. We thank you very much 
for your participation, and the hearing is adjourned.
    [Whereupon, at 12:20 p.m., the committee adjourned, to 
reconvene subject to the call of the Chair.]
                              ----------                              


             Additional Statements Submitted for the Record


 Submitted Statement of American Foreign Service Association, John K. 
     Naland, President and Joseph Pastic, Vice President for USAID

    Mr. Chairman and Members of the Committee, the American Foreign 
Service Association (AFSA) and its 23,000 active-duty and retired 
members of the Foreign Service appreciate the opportunity to share our 
views on the proposed legislation to create both the Millennium 
Challenge Account (MCA) and the Millennium Challenge Corporation (MCC). 
The Association is both the professional organization and the 
recognized bargaining agent of the Foreign Service. We thus represent 
over 1,000 Foreign Service Officers who work at United States Agency 
for International Development (USAID) and who make up one half of the 
U.S. government corporate memory on international development.
    We applaud the innovation and foresight that has sought new ways of 
helping the poor of the world through different approaches to 
delivering U.S. foreign assistance in these changing times. USAID and 
its employees have proven themselves expert at conforming a world-wide 
set of unique country development strategies with a broad array of 
administration and legislative priorities and mandates. It is with this 
40 years of development experience and expertise developed ``on the 
ground'' that we view the proposed legislation and wish to share our 
concerns with you.
the administrator of usaid should be added to the board of directors of 
                  the millennium challenge corporation
    While the Board of Directors of the Millennium Challenge 
Corporation, the administering body of the MCA, is designed to have 
cabinet level Directors, AFSA believes that this proposal is sorely 
deficient and that the Administrator of the United States Agency for 
International Development should also be a member of the Board because 
of the specialized expertise and perspective that he can provide during 
important deliberations on general policy, directions, and programs.
    The assistance provided through the MCA is to be additional to 
existing assistance activities, and regular U.S. programs will continue 
even in MCA-participating countries. Certainly as both programs exist 
in a country, a commonality of goals, strategy and policy coherence and 
coordination between both the MCA and the regular assistance programs 
will be required. The Administrator of USAID provides a unique nexus 
for the MCC board in that the Administrator will be able to inform the 
Board of current programs in a country and particular problems that may 
be encountered, help to assure the complimentary nature of both MCA and 
regular programs in a particular target country, and issue policy 
guidance to USAID.
    AFSA believes a sound relationship between the MCA and USAID is 
essential to the success of both programs and to this Nation's overall 
foreign assistance effort, and we urge the Committee to include the 
Administrator of the United States Agency for International Development 
on the Board of the Millennium Challenge Corporation. The Board should 
not be limited to a certain level of rank, but rather should be 
determined by what each of the Directors can add to the success of the 
effort.
                            staffing issues
    With a central mandate of the MCA requiring performance, results 
and accountability, a key requirement of the Millennium Challenge 
Corporation will be the ability to effectively monitor the programs in 
the target countries. The Corporation is to have a staff of 100 people, 
largely detailed from other agencies, to maintain this oversight and 
accountability standards over a $3 billion program in Fiscal Year 2004, 
and what will eventually become a $5 billion program.
    AFSA firmly believes the Foreign Service of USAID is uniquely 
skilled, experienced, and positioned to do this work, and should be an 
integral part of the Washington staff and the effort around the world.
    USAID Foreign Service has developed the expertise in formulating 
coordinated country strategies and implementation of programs. They are 
skilled in performance management and host-country fiscal 
responsibility that meet the most rigorous standards. In those few 
instances when the safeguards failed, it was USAID that ``sounded the 
alarm'' and sought the help of investigators. Today, much of the work 
of USAID is that of a contracting agency that works through a vast 
network of educatirnal and other non-government grantees and private 
contractors both large and small. These are the skills needed by the 
staff of the Corporation, and these are the skills that USAID's Foreign 
Service has developed over years of ``doing the work'' of international 
development.
    Further, while USAID will not be managed by the MCA, it is likely 
that its staff, especially those located in MCA participant countries, 
will play a strong supporting role. They will be in place in these 
countries, and they will have the developed skills and experience to 
provide a constant presence and perspective that a ``fly-in, fly-out'' 
staff person from the MCC's Washington headquarters will not have. 
However, this will present another challenge to the in-country USAID 
Foreign Service Officer. Because these countries will have both MCC 
programs and regular, on-going USAID development programs, AFSA is 
concerned that the support required by the MCA, both programmatic and 
administrative, will diminish the ability of an already ``thinly 
stretched'' staff to continue managing regular assistance programs that 
they are also responsible for. Certainly the Foreign Service has worked 
under such conditions before and they have thrived from challenges, but 
such conditions also take their toll in burn-out and morale, and the 
Committee should be aware of this. After years of such working 
situations in the Department of State, and after several serious 
warnings in a number of important studies, the State Department, under 
the leadership of Secretary of State Powell, developed the Diplomatic 
Readiness Initiative to meet a serious personnel shortfall in the State 
Department.
                the need for workforce planning at usaid
    While it is certainly not the responsibility of legislation 
creating the MCA and the MCC, personnel issues at USAID will influence 
the success of the MCA.
    For USAID to handle its present duties, as well as potential 
emerging tasks with the MCA, the rebuilding of Iraq and the enhanced 
Global Health Initiative, it is essential that USAID have the staffing 
and operating budget needed to do its job. USAID is struggling to 
recruit Foreign Services Officers at the rate of attrition. However, it 
is still falling short and not even meeting attrition. AFSA believes 
the personnel budget and staffing levels provided fall far short of 
real requirements and that the same workforce planning review that gave 
rise to the State Department's seminal Diplomatic Readiness Initiative 
is required at USAID. USAID suffers staffing gaps, lacks a training 
float, and has too many categories of non-direct hire employees that 
seriously impacts the work of the Foreign Service at USAID.
    Mr. Chairman, as the Committee considers the important skills, 
talents, experience, and perspective that the Foreign Service can 
provide to the success of this important MCA initiative, AESA urges 
that in later legislation, the Committee also consider the personnel 
needs of the Foreign Service at USAID.
                               conclusion
    Mr. Chairman and Members of the Committee, the MCA initiative 
brings needed additional resources and a different, and important 
approach to the United States' international development efforts. 
However for this program to fully succeed, the American Foreign Service 
Association believes and strongly urges the Congress to include the 
Administrator of the United States Agency for International Development 
as a member of the Board of Directors of the Millennium Challenge 
Corporation as it develops the implementing legislation. Further, AFSA 
believes that the Foreign Service of USAID is experienced, expert, 
certainly talented and well position in this area to play an importznt 
role, both in Washington and abroad, in performing the necessary work 
to meet the objectives of the MCA. AFSA encourages the Administration 
and the Congress to fully utilize this cadre of dedicated men and women 
to bring the goals of the MCA to fruition.
    The Foreign Services welcome the challenges and opportunities 
before us as the MCA moves from a concept announced by the President at 
the Inter-American Development Bank last March to reality, and we thank 
again the Committee for this opportunity to share our views and 
concerns with you.

                                 ______
                                 

Submitted Statement of Bob Perciasepe, Senior Vice President, National 
                            Audubon Society

    Mr. Chairman and Members of the Committee:
    Thank you for the opportunity to testify about the new Millennium 
Challenge Account initiative proposed by President Bush.
    For more than 25 years Audubon has spoken out in support of 
increased support for international development funding. The reason for 
this is simple: we believe that stronger economies in the developing 
world are critical to the long-term survival of birds, wildlife and the 
habitat they need for survival.
    When people are prospering, they think long-term and make 
investments in environmental protection that range from sustainable 
agriculture and forestry to sewage treatment plants, clean air and 
national parks.
    When mortality is high, and economies are struggling, people cannot 
think beyond tomorrow and forests, rivers, wetlands and birds and 
wildlife inevitably suffer as a consequence.
    As one of the oldest and largest environmental organizations in the 
world, we know the world's interconnectedness predates international 
banking and the Internet by many millennia. Here in the U.S., ``our'' 
songbirds travel the world, from Mexico to Argentina, and from Korea to 
Tanzania. ``Our'' fisheries depend on biological food and migration 
chains that stretch across the globe, and ``our'' sea turtles may have 
been hatched on the shores of Costa Rica or Indonesia. The butterflies 
and dragonflies soon to be arriving back in our gardens are returning 
to the U.S. after a many-thousand mile migration beyond our borders.
    Because we are aware of the interconnectedness of the natural 
world, we are pleased that the Bush Administration has proposed a 
significant increase in foreign aid, and are particularly pleased that 
it focuses on poor nations at the bottom of the global economic ladder.
    In addition, we commend the Bush Administration for trying to 
choose carefully, invest wisely and encourage political and economic 
development in those countries that are ready for change. What one does 
with foreign aid--where it goes and how it is used--are extremely 
important issues. If you believe that development aid can make a world 
of difference--and we certainly do--then performance measures able to 
track our success and progress can certainly help make that case if 
they are meaningful and if the programs are given time to succeed.
    As President Bush has noted, economic development in much of the 
less developed world is tied to political and economic change. Audubon 
believes, however, that economic development is also tied to 
demographic change.
    The fundamental development challenge ahead is how to cope with the 
addition of 1.5 billion people over the course of the next 25 years and 
the addition of 2.8 billion people over the course of the next 50 
years. To put these numbers in perspective, we will add more people to 
the world in the next 25 years as existed in 1925, and add more people 
to the world in the next 50 years as existed across the globe at the 
close of World War II.
    Nearly one hundred percent of world population growth is now 
occurring in the developing world. In fact, it is not too much to say 
that rapid population growth is one of the defining characteristics of 
underdevelopment, and a core reason for political instability and 
economic lethargy in many regions of the world.
    The relationship between population growth and economic growth is a 
chicken-and-egg question that has fostered a great deal of 
nonproductive debate over the years. There are those that say birth 
rates will naturally decline if democracy and capitalism are embraced, 
if free markets are allowed to work unfettered, if the status of women 
is improved, and if gross domestic investments in education are 
dramatically increased.
    No doubt this is true.
    That said, in the arena of family planning the most obvious 
solutions have worked well for a very long time. If we have learned 
anything over the course of the last 30 years, it is that massive 
social, political, and economic changes are not necessary to slow the 
rate of human population growth. In most cases, simply improving access 
to the full array of modern contraceptive methods at the level of city, 
village, and hamlet is often enough to dramatically slow population 
growth, reduce infant mortality, and strengthen economies at both the 
village and national level.

   Consider Iran--a fundamentalist Muslim country where the 
        status of women is not notably high by western standards. 
        Despite this reality, however, Iran has seen its birth rates 
        plummet due to the government's desire to slow population 
        growth rates in order to strengthen economic development. 
        Iran's state-sponsored condom factory is the largest in the 
        Middle East, and both men and women must take a class on modern 
        contraception before receiving a marriage license. As a result 
        Iran now has a fertility rate that is lower than that of the 
        U.S. As population growth rates in Iran have slowed, political 
        stability and economic growth have gained traction and 
        environmental protection is now on the national agenda. It's 
        immediate neighbors--Afghanistan, Pakistan, and Iraq, where 
        birth rates hover well over 5 children per woman--have had 
        dramatically different economic, political, and environment 
        outcomes over the last decade in part due to the political and 
        economic instability inherent to countries with very rapid 
        rates of human population growth.

   Consider Sri Lanka--a county of many faiths and 
        nationalities, which has also made access to a full range of 
        modern contraceptives a national development goal. Today Sri 
        Lanka has a fertility rate that is 50% lower than that of 
        India, its neighbor to the north. As a direct consequence of 
        falling fertility, life expectancy at birth in Sri Lanka is 11 
        years longer than that of India, and per capita income is 35% 
        higher.

   Consider Costa Rica--a predominantly Catholic country whose 
        birth rate is a full 80% lower than that of Guatemala. Not only 
        does the population of Costa Rica enjoy a life expectancy rate 
        11 years longer than that of Guatemala, it also has twice the 
        per capita income and a thriving ecotourism industry based on 
        the protection and management of its vibrant natural resource 
        base.

    The examples above do not stand in isolation. Mexico, Korea, 
Thailand, and Turkey have all seen dramatic declines in fertility. With 
those declines has come increased hope for economic development and 
political change and a growing middle class that counts environmental 
protection among its concerns.
    As seen in the examples above, modern contraceptive methods have 
been embraced by people of every faith, of every culture, and on every 
continent. Italy and many other predominantly Catholic countries have 
the lowest fertility rates in the world. Clearly, in the real world 
religion is not an obstacle to family planning and contraception is not 
a controversial issue and need not be treated as such by this Congress 
or this Administration.
                           one recommendation
    Audubon believes that the Millennium Challenge Account initiative 
should include performance measures that track access to modern 
contraceptive methods in developing countries.
    You will note that these recommended performance measures do not 
track falling birth rates and do not track contraceptive use.
    This is intentional.
    Audubon believes that in the arena of family planning we should be 
striving to simply give people what they want. We believe that if 
people are given all the information, and access to all the modern 
methods of contraception, then individuals will make the right choices 
for themselves, for their families, for their communities, for their 
country and ultimately for the environment.
    Just as we believe people will chose democracy if given a political 
choice, and capitalism if given an economic choice, we believe people 
in the developing world will also chose a modern contraceptive method 
if they are made widely available at prices even the indigent can 
afford.
                              two cautions
    Along with this public policy recommendation, Audubon offers two 
cautions that fall under the header, ``first do no harm.''
    Our first caution is to make sure that existing development 
programs, agencies and personnel are strengthened by the MCA 
initiative. Though we understand that the Millennium Challenge Account 
initiative is not designed to supplant the U.S. Agency for 
International Development, it could easily weaken that agency by 
drawing critical personnel away from core management functions.
    It is not entirely clear to us why a new federal bureaucracy is 
needed to administer grants made under the Millennium Challenge Account 
initiative. The U.S. Agency for International Development is not 
broken--it is simply an agency that needs a little more gas (money) and 
perhaps a new sparkplug or two (good managers empowered by Congress and 
the President). If key personnel are removed from the U.S. Agency for 
International Development to manage the Millennium Challenge Account 
initiative, we may find that we have harmed a vital and working federal 
agency that has demonstrated real development success over the years. 
On the other hand, if experienced personnel in the field of 
international development are not hired to manage the Millennium 
Challenge Account initiative, we may see waste, inefficiency, and 
unnecessary redundancy as this new bureaucracy ``recreates the wheel''. 
Both outcomes should be avoided.
    Our second caution is that in gauging the success of the Millennium 
Challenge Account initiative that ``sustainable development'' be 
defined broadly and not solely in economic terms. An industry can be 
profitable with very little of the money staying in the country and 
while a great deal of environmental damage is occurring. One need only 
look at logging in Indonesia or coal mining in Kentucky to see examples 
of economically profitable enterprises that left the people and the 
environment shattered. This is an outcome that should be avoided, and 
we recommend that language addressing environmental protection and 
capital retention within the grantee countries be inserted into any 
legislation being considered.
    We thank you and the members of this Committee for giving Audubon 
the opportunity to testify today, and we look forward to working 
closely with you in the future.
                              ----------                              


             Additional Questions Submitted for the Record


 Responses of Hon. Alan Larson, Under Secretary of State for Economic, 
  Business and Agricultural Affairs, to Additional Questions for the 
            Record Submitted by Senator Joseph R. Biden. Jr.

    Question 1(a). Five years ago, Congress (led by this committee), 
carried out an extensive restructuring of the foreign affairs agencies 
in the Foreign Affairs Agencies Consolidation Act of 1998 (Subdivision 
A of Division G of P.L. 105-277). As part of that reorganization, the 
Agency for International Development was brought under the ``direct 
authority'' of the Secretary of State, and the Secretary gained the 
statutory authority to supervise foreign assistance budgets and 
strategies. One of the purposes of the Act was to strengthen the 
coordination of U.S. foreign policy and the leading role of the 
Secretary of State in the formulation and articulation of that policy.

    Doesn't the creation of a new aid organization contradict the 
objectives of coordination and of giving the Secretary a leading role 
in policy formulation as set forth by Congress in the 1998 act?

    Answer. As Chairman of the Board of the Millennium Challenge 
Corporation (ICC), the Secretary of State would exercise his 
responsibility under the Foreign Assistance Act of 1961\1\ to supervise 
and coordinate U.S. economic assistance. The Secretary takes this 
responsibility seriously and will ensure that the programs and policies 
of the MCA promote the foreign policy interests of the United States 
and are well coordinated, both in Washington and the field, with other 
assistance programs. Secretary Powell also sees his role as Chairman of 
a cabinet-level MCA Board as essential to ensuring there is strong 
Cabinet-level accountability for the MCA.
---------------------------------------------------------------------------
    \1\Section 622(c) of the Foreign Assistance Act of 1961 (as 
amended) provides that ``. . . the Secretary of State shall be 
responsible for the continuous supervision and general direction of 
economic assistance to the end that such programs are effectively 
integrated both at home and abroad and the foreign policy of the United 
States is best served thereby.'')
---------------------------------------------------------------------------
    The MCA's targeted mission reaffirms our development objectives and 
contributes to an integrated strategy for achieving them. The MCC will 
focus on spurring growth in the subset of developing countries that 
have policies in place to use such assistance most effectively to 
achieve lasting results. USAID, State, and other agencies will continue 
to deliver humanitarian and regional assistance, to address complex 
emergencies, and to work with failed and failing States, all issues 
critical to U.S. national interests. USAID will also work with 
countries that are MCA ``near misses'' to encourage them to achieve the 
development-readiness essential for the MCA.

    Question 1(b). Why should Congress not integrate the MCA into the 
existing structure legislated in 1998--that is, by giving the Secretary 
of State supervisory authority over the program, but leave it to AID to 
implement it?

    Answer. The MCA represents the President's vision for redefining 
and revitalizing development assistance. It is a performance-based 
initiative that rewards country responsibility. Too few countries are 
achieving sustained economic growth, which is a prerequisite for 
reducing poverty. By focusing on those under-developed countries 
demonstrating the strongest commitment to good governance and sound 
policies, the MCA will put into practice the main lesson we have 
learned about development over the past half century. It will do so by 
challenging countries to create the open and accountable policy 
environment that our experience shows will lead to economic growth.
    A new institution is the best hope to bring about this sea change 
in our current approach. The existing agencies that might administer 
the MCA--State and USAID--both have many other bureaucratic mandates 
and priorities. The MCA needs flexibility to carry out its innovative 
mandate and should start with a clean slate to give it the best chance 
to succeed and show that this approach works.
    If it is to respond to developing country priorities, the MCA 
should not be constrained or directed to specific areas of funding. If 
it is to operate with a lean staff and draw from the best and brightest 
in the public, private and non-profit sectors, the MCA must have 
special personnel authority. If it is to be effective, it will need the 
ability to contract and procure broadly. If it is to succeed in its 
mission, the MCA must be open to a new way of operating.
    All this can best be achieved through an innovative, flexible, 
narrowly targeted, and highly visible separate organization that 
complements other assistance. That is why the Administration has 
proposed the establishment of a Millennium Challenge Corporation (MCC).

    Question 2. How does the draft Administration bill affect, if at 
all, the powers of the Secretary of State as set forth in the 
provisions of section 1523 of the Foreign Affairs Agencies 
Consolidation Act of 1998 (Subdivision A of Division G of P.L. 105-277) 
and section 622(c) of the Foreign Assistance Act of 1961?

    Answer. The bill authorizes appropriations for use as foreign 
assistance outside the authorities of the FAA.
    The bill has no impact on assistance provided under Sec. 622 of the 
FAA., and the Secretary's broad responsibility for the ``continuous 
supervision and general direction of economic assistance, military 
assistance and military education and training programs . . .'' As the 
legally established Chair of the cabinet-level MCA Board, the Secretary 
will be in a position to shape the overall policy direction of the MCA 
in a manner consistent with broad U.S. assistance objectives.

    Question 3. How will 100 people be able to administer $5 billion 
worth of assistance?

    Answer. Since only a limited number of countries will qualify for 
the MCA in each year, the MCC requires a smaller staff than would be 
the case if the MCA had a presence in most poor countries.
    The MCA is also designed to be demand-driven and country-owned. We 
expect each recipient country to take the lead in program design and 
implementation, eliminating the need for top-down program development 
by MCC staff.
    The MCC will be assisted by existing USG staff in the field. The 
MCC will also draw upon outside expertise, including for monitoring of 
MCA activities, where appropriate and effective. It is also envisioned 
that the MCC will rely on contracts with other agencies or independent 
contractors for most administrative functions.
    The number of permanent employees is not set in stone. 
Nevertheless, the effort will be to develop a lean and flexible 
organization that aims for maximum efficiency, with a focused 
professional core staff.

    Question 4. What will be the interaction between the MCA and AID? 
If, as was suggested at the hearing, the MCA will rely on AID to help 
administer the money, why create a new government organization with 
which AID is not directly affiliated?

    Answer. MCC and USAID activities will complement each other. The 
MCC will operate in fewer countries, in a different manner than AID and 
with a far more focused development mandate.
    When both organizations are in the same country, AID will conduct a 
review of its programs and determine which should continue and which 
will phase out or become a part of the MCA program. USAID will also 
target countries that barely miss MCA qualification for assistance to 
help improve their performance in areas in which they fall short.
    By law, USAID reports to the Secretary of State, who is also 
designated by the Administration to be Chairman of the MCC Board of 
Directors. This supervision will help ensure that the MCC and USAID 
work in close cooperation and coordination both in Washington and in 
the field.
    MCC staff in the field will depend upon support from other elements 
of the U.S. presence, which includes the State Department and USAID, 
for information, expertise, and representation. As far as specific 
services, the MCC might contract with USAID or other organizations to 
provide technical assistance, implement programs, monitor and evaluate 
programs or disburse funds. The MCC will require flexibility to operate 
in the most effective manner to achieve its objectives in each country.

    Question 5. Mozambique, a country which is expected to be eligible 
far MCA funding, has an extensive aid program. The fiscal year 2003 
request was $62 million--an increase of $14 million over the 2002 
request. Funding was specifically requested to foster economic growth, 
democratic governance, maternal and child health, and private sector 
development. Likewise, the administration requested over $50 million 
for development programs in Ghana this year.

    Will the aid programs that we have in place in qualifying countries 
be terminated once they are granted MCA funds? What will happen with 
the AID programs in Ghana and Mozambique if they receive MCA funds? 
Will the programs AID is currently engaged in be terminated? How will 
the MCA and our regular development programs work together?

    Answer. It is not yet clear which countries will qualify for the 
MCA.
    Because MCA funds would represent a major increase in a country's 
development assistance, USAID would likely undertake a strategic review 
of its programs in MCA qualifying countries. As mentioned in the 
response to question 4, some USAID programs may well be continued, such 
as regional programs or those fighting HIV/AIDs or trafficking in 
persons, while others logically would be phased out or incorporated 
into MCA program. Some USAID assistance might also be redirected from 
new MCA countries to countries that just miss the list of better 
performers to improve their chances of becoming an MCA partner with the 
United States.
    In any case, we intend to coordinate MCC and USAID efforts so that 
the most successful and important development efforts would continue.

    Question 6. Please provide, as requested, a copy of the results of 
any ``test runs'' you have undertaken prior to the date of the hearing 
of the indicators against countries that are IDA-eligible.

    Answer. Various runs with different income groupings and shifting 
data sets could badly mislead as to likely ultimate outcomes. Rather, 
the Administration stands ready to provide a detailed briefing to 
interested Committee members and staff on how all phases of the 
proposed selection system would actually operate.

    Question 7. How often does the Administration intend to revise the 
criteria used to determine MCA eligibility?

    Answer. The 16 indicators chosen to help select qualifying 
countries will continue to be reviewed throughout the next few months 
and during the life of the MCA. Certain indicators may be dropped in 
favor of better data, or other indicators may be added if it is 
determined doing so will help the Board of the MCC choose the most 
qualified countries based on the criteria of ``governing justly, 
investing in people, and encouraging economic freedom.'' Any changes 
will be done in a way to balance the need for flexibility with the need 
for predictability, so that countries know well in advance by what 
standards they will be judged. The process will continue to be dynamic, 
rigorous, transparent, and based on performance.

    Question 8. Will there be an Inspector General (IG) for the 
Millennium Challenge Corporation?

    Answer. The MCC will be audited in conformity with the provisions 
of 31 U.S.C. Sec. 9105, in accordance with the requirements for a 
government corporation. It is not envisioned that the MCC will have its 
own independent Inspector General.

    Qiestion 9. If the answer to the previous question is ``No,'' will 
any current IG in the government perform IG functions? If not, why not?

    Answer. In accordance with 31 U.S.C. Sec. 9105, the MCC will either 
contract to be audited by an Inspector General from aa existing agency 
or by an independent external auditor, as determined by the CEO of the 
MCC with the approval of the MCC Board of Directors.

    Question 10. What is the purpose of section 105(c) of the draft 
Administration bill?

    Answer. In the case of assistance provided under another authority, 
(e.g. under the authority of the Foreign Assistance Act) and used in 
conjunction with MCA assistance, section 105(c) would allow such 
assistance to be used in accordance with MCA authorities. This would 
simply allow for instances where other U.S. assistance resources can be 
used in conjunction with MCA's business-like partnership in an 
effective manner that serves U.S. policy goals and MCA development 
priorities.

    Question 11. Would section 105(c) of the draft Administration bill 
permit a transfer from any other appropriation account, whether from 
accounts under the Foreign Operations Act or any other Act? Would funds 
transferred be subject to any restrictions contained in the Act from 
which the funds were transferred?

    Answer. Section 105(c) is not a transfer authority. The account 
being used would need to be authorized to be available to provide 
foreign economic assistance. Such funds, if used in conjunction with 
MCA assistance would, under section 105(c), get the benefit of the 
authorities applicable to MCA assistance.

    Question 12. Under the draft Administration bill, is the 
Corporation a government corporation as that term is defined in 5 
U.S.C. Sec. 103?

    Answer. Yes; it is the same as that defined in 5 U.S.C. 
Sec. 103(1).

    Question 13. If Congress were not to waive nearly all laws, as is 
contemplated by section 105(b)(1) of the draft Administration bill, 
what major laws, specifically, should be waived to provide the 
necessary flexibility for this program?

    Answer. We are hopeful that Congress will accept the language 
proposed in section 105(b)(1). It is for that reason we have made a 
country's eligibility for MCA assistance subject to its eligibility to 
receive other economic assistance under the Foreign Assistance Act.

    Question 14. What is the legal effect of, section 107 of the draft 
Administration bill?

    Answer. Section 107 requires that each Millennium Challenge 
Contract describe the purposes of MCA assistance, the activities that 
will be funded to achieve these purposes, and the period of time over 
which MCA assistance will be provided for these activities and 
purposes. In essence, it holds the MCC and MCA partner countries 
accountable for a shared business plan.

    Question 15. Why is section 204(e) of the draft Administration bill 
necessary?

    Answer. Section 204(e) provides the MCC with authority to expedite 
the procurement process in the event that the Board or the CEO believes 
this to be necessary to effectively manage the program.

    Question 16. Does any other foreign affairs agency have the 
authority contemplated by section 204(e) of the draft Administration 
bill? If so, which agency or agencies?

    Answer. Section 204(e) is a narrower version of section 633(a) of 
the Foreign Assistance Act.

    Question 17. Section 205(a)(7) of the draft Administration bill 
purports to grant certain privileges and immunities to individuals 
employed by the Corporation. Please explain how legislation can grant 
such immunities.

    Answer. Only the host country can grant privileges and immunities. 
Section 205(a)(7) should state:

          The CEO should seek, through the U.S. Department of State, to 
        obtain privileges and immunities at least equivalent to those 
        of the technical and administrative staff of the Mission of the 
        United States to such country for individuals employed by the 
        Corporation and, as appropriate, individuals detailed to or 
        contracted by the Corporation. Such individuals shall be 
        subject to 22 U.S.C. 3927 in the same manner as United States 
        Government employees.

    Question 18. What precedents are there for the following provisions 
of the draft Administration bill--

          a. Section 205(a)(2).
          b. Section 205(a)(3)

    Answer. Given the relatively small size of the MCC, the MCC will 
require broad discretion to employ individuals without regard to civil 
or foreign service limitations. It is anticipated that in order to 
sustain a fresh and innovative approach staff would not serve more than 
5 years and therefore a more flexible model than the Civil and Foreign 
Service systems would be appropriate. Sections 205(a)(2) and 205(a)(3) 
were based on, and expanded upon, authorities provided to the Overseas 
Private Investment Corporation (section 233(d) of the Foreign 
Assistance Act of 1961), the Enter-American Foundation (section 
401(e)(3) of the Foreign Assistance Act of 1969, the African 
Development Foundation (sections 506(a)(5) and 506(a)(7) of the 
International Security and Development Cooperation Act of 1980) and to 
agencies administering foreign assistance programs (section 625(b) of 
the Foreign Assistance Act of 1961). Although not used as a model, the 
Tennessee Valley Authority is also provided broad authority to appoint 
and compensate employees without regard to the Civil Service laws 
applicable to officers and employees of the government (16 U.S.C. 
section 831b)

    Question 18. What precedents are there for the following provisions 
of the draft Administration bill--

          c. Section 205(b)(3).

    Answer. Section 205(b)(3) was based on language in the E-Government 
Act of 2002, section 209(c), that provides for the assignment of 
employees from private sector organizations. This authority allows for 
additional flexibility in bringing under one roof the best and 
brightest detailees from federal agencies, the NGO/PVO community, and 
the private sector.

    Question 19. Why is section 205(a)(1)(D) of the draft 
Administration bill necessary, given that the ``notwithstanding'' 
language in section 205(a) does not purport to waive any provisions of 
Title 18, United States Code.

    Answer. It was included only to indicate that those provisions 
would not be waived, but it is technically unnecessary.

    Question 20. Would all employees of the Corporation be expected to 
have security clearances?

    Answer. Employees would be expected to have security clearances if 
their jobs required access to classified materials, e.g., reporting on 
developments in foreign governments. Such reporting, for example, could 
be especially important regarding trends and developments related to 
issues such as national leadership, governance, and corruption.
                               __________

  Responses of Hon. Andrew S. Natsios, Administrator, U.S. Agency for 
   International Development, to Additional Questions for the Record 
               Submitted by Senator Joseph R. Biden, Jr.

    Question. What is the average size of the assistance or grants 
portfolio for which USAID officers are responsible?

    Answer. Generally speaking, no single USAID officer is responsible 
for managing a grants portfolio. Our portfolios are managed by teams of 
officers working together from our technical, program procurement and 
financial offices. On a per capita basis, USAID direct hire officers 
serving overseas manage roughly $7.5 million.

    Question. Please describe how the Executive Branch currently 
implements Section 102(b)(1) of the Foreign Assistance Act of 1961, 
which requires that development assistance from the United States 
``shall be used in support of, rather than substitution for, the self-
help efforts that are essential to successful development programs and 
shall be concentrated in those countries that take positive steps to 
help themselves.'' Please describe how the provisions of the Millennium 
Challenge Account will operate differently from this principle.

    Answer. The principle of self-help has been central to USAID's 
development assistance programming and attempts to achieve sustainable 
development for years. What we have learned over the decades is that 
the likelihood of achieving development and related foreign policy 
results is greatly enhanced if countries take ownership for the 
development process. Governments must be committed and willing to put 
in place the necessary enabling environment economic, social and 
political. But it is also important for the private sector, 
nongovernmental and local governments to participate. This principle is 
embodied in our strategic planning, resource allocation, and 
performance monitoring and evaluation systems. It is primarily 
implemented through our overseas field offices which are held 
accountable for intended results. Where needed, programs incorporate 
assistance to encourage democratic participation and to strengthen 
institutions. Further, the principle of self-help is reflected in our 
requirements for host country contributions and cost-sharing for NGO 
grantees.
    Given this history and the importance we place on participation, 
commitment and self-help, we are taking several steps to more broadly 
and more aggressively apply the principle and better link performance 
to foreign aid programming and budgeting. A prime example is the new 
``strategic budgeting'' model we are developing. When operational, we 
will be able to more objectively relate country allocations to a 
combination of need, commitment, program performance and foreign policy 
priorities.
    I should note that the importance of self-help and ownership by the 
recipient country is shared by the donor community. Ways of better 
achieving this ownership are the subject of active discussion by the 
OECD Development Assistance Committee, and concrete recommendations are 
being developed. We are actively engaged in this dialogue.
    The concept of the MCA is indeed very similar to that of Section 
102(b)(1) requiring that U.S. development assistance support, rather 
than substitute for self-help efforts, and that it be targeted at 
countries taking positive steps to help themselves. However, the MCA 
goes a step further in targeting large amounts of assistance on the 
poorest countries that have demonstrated a commitment to governing 
justly, investing in their people, and promoting economic freedom, as 
measured by a set of concrete and objective criteria. Because the MCA 
will be working with the best performing countries, it will be founded 
on a genuine partnership between the U.S. and the recipient country, 
and will strive to achieve a broad coalition around development 
investment within a country. A country's MCA program should reflect an 
open consultative process, integrating a broad range of interests, and 
should bring an inclusive perspective to discussions between the 
country and the MCA.

    Question. Please describe how the Executive Branch currently 
implements Section 102(b)(4) of the Foreign Assistance Act of 1961, 
which requires the President to ``assess the commitment and progress of 
countries in moving toward the objectives and purpose of [chapter 1 of 
the Act] by utilizing criteria.'' a non-exclusive list of which 
follows.
          a. How is such assessment conducted? Who conducts the 
        assessment?
          b. Is the assessment conducted annually? If not, how 
        frequently is it conducted?

    Answer. USAID assesses such information on every country annually 
by reviewing available statistics. The assessment is done in the Bureau 
for Policy and Program Development, and is reported within the Agency, 
to Congress and to the American people in the Agency's Annual 
Performance Report. Some of the data is generated within the U.S. 
Government, including work done by USAID, the Census Bureau, the 
Commerce Department and the State Department, and some of it is 
dependent on work done by other organizations such as the World Bank, 
Freedom House, and Transparency International.
    These assessments are done annually. In some cases, annual 
estimates are made by extrapolating from data that are not collected 
frequently. These are done by such agencies as the Census Bureau and 
the World Bank with well known and published methodology.
    USAID is committed to using data to assess the commitment and 
progress of countries in moving toward the objectives and purposes of 
the FAA of 1961, the New Directions Act of 1972, and many additional 
concerns raised in subsequent Foreign Operations Appropriations Acts. 
Obviously, the indicators have changed since 1961 as we have learned 
more about tracking country progress and the most effective and 
efficient indicators. At the outset, it should be stated that USAID 
does not attempt to duplicate the extensive research and statistical 
analysis that other organizations such as the World Bank and the United 
Nations do. Such a duplication of effort would not be a wise use of our 
resources.
    Factors referenced in the FAA:
          (A) Increase in agricultural productive per unit of land 
        through small-farm, labor-intensive agriculture;
          (B) Reduction of infant mortality;
          (C) Control of population growth;
          (D) Promotion of greater equality of income distribution, 
        including measures such as more progressive taxation and ore 
        equitable returns to small farmers;
          (E) Reduction of rates of unemployment and underemployment;
          (F) Increase in literacy;
          (G) Progress in combating corruption and improving 
        transparency and accountability in the public and private 
        sector.
    The major place that these figures are analyzed and reported is in 
the annual Agency Performance and Accountability Report, which was 
submitted to Congress this year on January 31, 2003. Trends are 
analyzed and reported, and made available to Congress and the American 
public. However, the Agency is consistently using such measures at both 
the country and Washington levels to ensure that the country situation 
is understood and trends monitored and programs adjusted to best meet 
these needs.
    Performance and Accountability Report country level indicators:
           1. Average Annual Gross Domestic Product Growth Rate per 
        Capita;
           2. Index of Economic Freedom Scores (trade policy; fiscal 
        burden of government, including tax policies; government 
        intervention in the economy; monetary policy; capital flows and 
        foreign investment; banking and finance policy; wages and price 
        controls and subsidies; property rights; regulation and black 
        market);
           3. Trends in Net per Capita Agricultural Production;
           4. Per Capita Net Food Production Index;
           5. Annual Micro-enterprise Lending: a) total funding, b) 
        active number of loans, c) percentage of loans made to women;
           6. Children enrolled in primary schools;
           7. Hectares under improved environmental management;
           8. Total Fertility Rate;
           9. Contraceptive Prevalence Rate;
          10. Under-five child mortality rates;
          11. Adult HIV prevalence rates;
          12. Freedom House Index scores (political rights and civil 
        liberties).
    In addition, USAID provides several additional reports to Congress 
that address some of the other original questions in the FAA. These 
include:
          1. The Progress in Education annual report, which includes, 
        among many other things, reports on progress in literacy.
          2. The report to Congress pursuant to the International Anti-
        corruption and Good Governance Act (P.L. 106-309) annual 
        report. While this report is only two years old, the Agency has 
        been tracking corruption for many years through a variety of 
        surveys and indices, including the Transparency International 
        index.
    For those issues raised in the original legislation that are not 
directly tracked, USAID has developed more appropriate approaches:
          1. It is unclear that ``increase in agricultural productive 
        per unit of land through small-farm, labor-intensive 
        agriculture'' is the appropriate mechanism to improve food 
        available and the economic situation of small farmers in the 
        current world. However, USAID does do substantial micro-lending 
        to farmers and other small-holders, that is tracked in the 
        micro-enterprise lending indicator listed above. As noted 
        above, we do track overall agricultural productivity and, where 
        it is appropriate, track specific factors such as ``non-
        traditional'' exports, which are likely to be produced by small 
        agriculturalists.
          2. Traditional measures of income inequality and of un- and 
        under-employment are almost useless in tracking income and 
        employment trends. This is even a difficulty in the United 
        States, where traditional unemployment figures do not include 
        those who have ceased looking for work, and many who are 
        employed in non-traditional jobs. Instead, we feel that 
        elements of the economic freedom scores, cited above, track 
        government commitment to improving the business climate for 
        creating employment in the private sector, particularly among 
        small and medium-sized businesses which are the main engines of 
        job growth.
    In addition to these sources, USAID maintains the Economic and 
Social Database which gathers a wide variety of data from around the 
world. This is immediately available to Agency managers and policy-
makers online, and is widely used both to access existing data sources, 
and to research new questions as they arise.
                               __________

 Responses of Hon. Alan Larson, Under Secretary of State for Economic, 
  Business and Agricultural Affairs, to Additional Questions for the 
             Record Submitted by Senator James M. Jeffords

    Question. During the hearing Senator Lamar Alexander posed a 
question to Al Larson. Senator Alexander encouraged the board to be as 
flexible as possible in considering the sectors it will fund. He noted 
that Gabon has set aside 12 percent of its land for national parks. He 
asked whether conservation would be a criteria that would be considered 
in qualifying for MCA funding. In responding, Mr. Larson rephrased 
Senator Alexander's conservation example in terms of achieving 
ecotourism. However, Mr. Larson did not fully answer the question: 
would conservation be considered as a criteria, perhaps under the 
``investing in people'' category, and would it be a sector for MCA 
funding?

    Answer. The goal of the MCA is to achieve poverty reduction through 
economic growth. MCA criteria for selection measure how well a country 
is performing in ``ruling justly, investing in people and encouraging 
economic freedom.'' These criteria were chosen because they correlate 
to economic development. Conservation, per se, is not a criterion for 
selection. However, the indicators do measure a number of the 
conditions necessary for conservation of natural resources: effective 
participation in governance by civil society, effectiveness of 
regulations, and protection of private property to name a few.
    The legislation identifies six examples of areas for MCA funding 
that are directly tied to a country's productivity and economic growth, 
namely agriculture, education, private sector, governance, health, and 
trade. These areas are meant to be illustrative, not exclusive. Because 
flexibility and country ownership are key concepts of the MCA, 
decisions on specific MCA investments will be made on a country-by-
country basis. MCA countries will identify investments that fit within 
each country's overall growth strategy. While eco-tourism, environment 
and water projects were not specifically mentioned as examples, a 
participating country and the MCC might choose to invest in these areas 
to support its development and growth strategy.

    Question. Last year, at several meetings in the United States and 
internationally leading up to the World Summit on Sustainable 
Development, the Administration's MCA was highlighted. For countries 
that qualify for MCA funding, could MCA funding be used to achieve any 
of the outcomes or goals from the WSSD? If so, which ones in 
particular?

    Answer. The MCA could help a participating country achieve a number 
of the outcomes or goals stressed at WSSD. These include improved 
governance, safe water, clean energy, including rural electrification, 
mass transportation, health, education, eco-tourism and agricultural 
development.
    As described in the response to the previous question, MCA funding 
will be country driven. Thus, a country could choose a program in any 
area that would be critical to achieving its development objectives.

    Question. On numerous occasions the Administration has said that 
the MCA will not be a substitute for current humanitarian assistance. 
However, humanitarian assistance stays either the same or decreases in 
various areas of the 2004 budget. Why? Are similar decreases 
anticipated in the 2005 and 2006 budgets?

    Answer. For FY 2004, the Administration has requested a total of 
$2.476 billion for humanitarian assistance purposes. This request is an 
overall increase of $230 million over the Administration's initial FY 
2003 request for comparable humanitarian assistance (although less than 
the amount now available from the just-enacted Omnibus Appropriations 
bill). The recently transmitted FY 2003 supplemental request, as you 
know, seeks additional humanitarian assistance for Iraq.
    MCA funding is requested for the purposes of economic development 
and can not be compared to nor offset humanitarian assistance 
requirements.
    We are not able to estimate the requirements for humanitarian 
assistance funds in FY 2005 and 2006 at this time.

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