Global Policy Forum

The President's $5 Billion Program Does More for Foreign Banks than the Needy

By Joshua Kurlantzick

In March 2002, with one war raging in Afghanistan and another looming in Iraq, President Bush announced that he intended to undercut terrorism by attacking poverty overseas. "I'm here today to announce a major new commitment by the United States to bring hope and opportunity to the world's poorest," Bush declared. Under his watch, the president said, America would increase its annual foreign aid to $5 billion. And instead of giving handouts, he added, the program would employ an entirely new model: investing in countries to spark their economic growth and holding them accountable for their policies. "I carry this commitment in my soul," Bush said, concluding his speech with a trademark religious touch. "We will make the world not only safer but better."

The president's plan looked revolutionary. U.S. aid efforts, long hampered by an ossified bureaucracy, often fail to ensure that recipient nations spend the money wisely. Bush's plan, by contrast, recognized that poverty cannot be conquered without economic development, and that countries should continue to receive aid only if they use it effectively. "It seemed a bold, exciting new experiment in development policy," says Mary McClymont, the former head of InterAction, the largest alliance of aid organizations in the U.S.

In a pattern that has become a hallmark of the administration, however, Bush's aid initiative -- the Millennium Challenge Corporation -- has become an object lesson in dramatic ideas followed by disastrous action. Over the past three months, Rolling Stone has reviewed the MCC's "compacts" with foreign countries, compared the work of similar agencies and spoken with a wide range of supporters and critics -- including many of the conservative insiders responsible for creating the program. Instead of hiring aid experts, the administration at first staffed the MCC with conservative ideologues. Rather than partnering with other countries, the White House operated on its own, disconnected from the rest of the world. And when experts criticized the new agency, the administration responded with a bunker mentality, refusing to talk to detractors and learn from its mistakes.

Today, four years after the president announced his initiative, the MCC has signed compacts with six countries -- offering only $1.2 billion in assistance. In February, Bush released a budget for 2007 that falls another $2 billion short of his pledge, bringing the total aid to less than half of what he promised. And the new budget once again pushes back the goal, stating that the administration "expects" to provide $5 billion annually in 2008.

"Not only has President Bush broken his word on funding, he has not put in the effort required to turn this excellent idea into a lifesaving reality," says Jamie Drummond, executive director of DATA, the international aid organization co-founded by Bono.

Even leading conservatives who initially supported the program are now blasting the MCC. "The great promise of the Millennium Challenge was met with tremendous hope and anticipation," said Rep. Henry Hyde, who voted to authorize the initiative as chairman of the House International Relations Committee. But now, he said, "we see a program struggling to get off the ground . . . lacking the boldness necessary to break the cycle of poverty" -- a failure that "belies the original vision."

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The MCC got off to a tough start. At a time when Bush was adopting a go-it-alone stance toward Iraq, the White House also decided it didn't need the world's help in ending poverty, preferring to create its own program from scratch. According to the leading federal watchdog agency, the Government Accountability Office, the MCC held initial outreach meetings with other international aid organizations -- and then rarely consulted them again. Gayle Smith, former senior director for African affairs at the National Security Council, says the White House even refused to draw on the experience of the U.S. Agency for International Development (AID), which has thousands of staffers posted all over the world.

Building an entire program from the ground up inevitably meant delays: It took the MCC more than a year to establish guidelines for handing out aid. Worse, say experts familiar with the process, creating a new organization simply created more hurdles for recipient nations, making an already complicated process even more cumbersome. "There's evidence that receiving countries are being overwhelmed by the number of different aid programs," says Lex Rieffel, a visiting fellow at the Brookings Institution who has studied the MCC.

In line with the conservative disdain for big government, the administration decided to keep the program small. Originally, Rolling Stone has learned, the officials who created the MCC wanted to limit its staff to no more than 100 -- making it effectively impossible to distribute $5 billion in aid. By comparison, MCC expert Steve Radelet has found, Britain's Department for International Development, which disburses some $3.3 billion a year in aid, has a staff of 2,200. Today the MCC has a staff of fewer than 200 -- not nearly enough to do the job. According to the GAO, the program lacks the "critical skills needed to carry out its mission."

Those charged with setting up the MCC were drawn not from the world of international aid but from the Treasury Department and the White House budget office. Robin Cleveland, a budget staffer who played a key role in creating the program, "had no idea of what development was," according to one of the MCC's early architects, who asked not to be identified. The first CEO of the program, Paul Applegarth, was a Republican campaign contributor with limited experience in international aid, having spent his career at financial institutions such as the Bank of America, American Express and Lehman Brothers. "Applegarth wasn't qualified to do the job," says a former official involved in the MCC's creation. "Folks that do development for a living, it's a skill -- it takes a lot of hands-on work."

Applegarth, in fact, had a different kind of work in mind. In a report he authored for a think tank, Applegarth outlined ways to "establish financial-sector development as an explicit objective of U.S. development assistance efforts in sub-Saharan Africa" -- in short, how to assist banks in the world's poorest countries. To do so, Applegarth recommended "bringing more people with capital market skills and experience into government by, for example, establishing a separate salary scale within the government for financial-markets experts" -- in other words, paying Wall Street honchos extra to aid the poor.

Under Applegarth, the MCC was dominated by a pro-business orientation. In fact, buried in the MCC's own charter is a statement committing the program to "achieve market-driven economic growth." A review of the program's compacts reveals that the MCC has favored projects closely linked to the private sector -- especially those that benefit commercial deals and investors. Rather than funding projects that directly aid the poor -- building schools and hospitals, providing electricity and clean water to rural villages -- the MCC takes a trickledown approach. Help private companies prosper, the reasoning goes, and jobs for the poor will follow. Or as Applegarth told a forum on aid to Madagascar, the MCC can "create opportunities for rural Malagasy by unleashing domestic investment."

The six compacts signed by the MCC reflect this pro-business ideology. In Cape Verde, the agency plans to spend almost $86 million to mobilize investment and build the infrastructure needed to move goods to market -- nearly all of the $110 million in aid to the impoverished country. In Nicaragua, another $92 million in aid will be spent on infrastructure. In Georgia, the MCC will spend $32.5 million to establish a Wall Street-style investment for "enterprise development." Other projects under consideration have included an industrial park in Senegal and a tourist resort in Central America. "The early compacts don't reflect a broad swath of needs, like health and education," says David Gootnick, director of international affairs and trade at the GAO.

In some cases, the MCC appears to be using aid to reward countries that support the president's war on terror -- even though it is not supposed to base assistance on political favoritism. Georgia, which has served as a base for U.S. military operations, received $295.3 million from the MCC -- despite corruption and human-rights abuses that should make it ineligible for assistance under the MCC's own guidelines. "I see an awful lot of politics in this," says Fiona Hill, an expert on the former Soviet states at the Brookings Institution. "Georgia has taken steps back in terms of rights and freedoms." Testifying before Congress, even Applegarth acknowledged that the aid to Georgia involved what he discreetly referred to as an "element of judgment."

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Given the MCC's business orientation, many countries have simply given up on requesting aid for health or education, focusing instead on banking and other projects favored by the administration. Madagascar asked for aid for hospitals and schools -- but none of the money in its compact is allotted for either health or education. Instead, roughly a third of the aid will be used to improve credit standards and assist financial institutions -- including $21 million to help banks in Madagascar clear checks. "Four French banks and the richest one percent of Madagascar's elite will be the primary beneficiaries of nearly twenty percent of the entire compact," noted Rep. Tom Lantos, who voted to authorize the MCC. "Millennium Challenge was meant to help the poor improve their plight through improved economic activity, not to subsidize rich foreign banks."

Poor nations are being told, in effect, that projects won't be considered for funding unless they can generate a profit. "Every indication they get from the MCC is that this is about economic growth," says Asma Lateef, senior policy analyst for the aid organization Bread for the World. "You have to yield economic rates of return in three to five years." But for many impoverished nations, such profitability is simply impossible. "In such poor countries, you're not going to be able to guarantee things like economic growth," says Patrick Cronin, a former U.S. AID official who helped create the MCC. "You might lose money [on projects like health and education], but you'll help people. But if you're used to making investments, you may be biased toward that instead."

Instead of bolstering America's image in the world, as Bush envisioned, the MCC is fueling frustration toward the U.S. In June, five African leaders visited the White House and "complained bitterly," in the words of Botswana's president, about the program's failure to deliver on its promises. Conor Walsh, who represents Catholic Relief Services, told Congress that leaders in Honduras were angered by the way that MCC officials tried to dictate the terms of aid. "Local citizen groups do not necessarily share the priorities set forth in the compact proposal and do not feel they were consulted sufficiently," Walsh testified. "Many Hondurans were left disillusioned."

In fact, while the MCC steers aid to business, the president has slashed funding for children's health in the world's poorest countries. "Resources for fragile states in Africa -- such as the Democratic Republic of the Congo, Ethiopia, Liberia and northern Uganda -- have been cut from last year, despite unmet needs they have right now," said Rep. Nita Lowey, who initially supported the MCC. "I find it extraordinary that the MCC model is being touted by the administration as an ideal and successful solution to poverty alleviation."

As the MCC has come under increasing attack, the program has circled the wagons. "Until very recently, MCC related to other government agencies and Congress as though they were under siege," says one congressional staffer. "They seemed to feel the need to defend their ideal of development and progress -- or lack thereof -- to even strident supporters of the program." The bunker mentality has even hampered communication between the MCC and personnel at U.S. embassies around the world, who are needed to assist the organization in target countries.

The lack of openness -- coupled with the failure to foster progress -- has alienated many of the MCC's most prominent supporters. The program "is not producing results on the ground," says Tom Hart, head of government relations for DATA. "The folks at the White House recognize that this was a signature presidential initiative. Now they really need to address the problems."

MCC officials insist that the organization is making headway. Applegarth, who stepped down as CEO last summer, says the agency is hiring more aid experts and must do a better job of touting its success. "It would be good to have more White House outreach for the program," he says.

But the MCC has not changed its pro-business strategy: The GAO reports that the agency is considering only three projects related to health and education. And congressional staffers say privately that the White House hasn't given the MCC the kind of presidential push it needs to win more friends in Congress. In September, the Republican Study Committee -- the House's caucus of conservative members -- proposed eliminating the MCC altogether. Nor did the White House replace Applegarth with a respected expert in international aid. Instead, it appointed John Danilovich, a businessman who has contributed $20,000 to the Republican National Committee. "He does not have the stature needed to push this program forward," one aid expert who has studied the MCC says privately, echoing the views of many staffers on Capitol Hill. "He's in the same weight class as Applegarth."

Then again, maybe that was the idea all along. Bush got a tremendous PR boost by announcing the MCC, winning the support of Bono and other high-profile aid advocates. "Maybe this is all bread and circuses, just a political game to make people think that the U.S. government is committed to reality," says Rieffel of the Brookings Institution. "When, in reality, the U.S. government doesn't care."

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