In 2002, President Bush called for a "new compact for global development" and proposed the formation of the Millennium Challenge Corporation (MCC). In January 2004, with strong bipartisan support, the U.S. Congress established the MCC and provided nearly $1 billion in initial funding and $1.4 billion and $1.7 billion in the following years for the MCC and its foreign assistance program, including the Millennium Challenge Account (MCA). The MCC focuses on promoting sustainable economic growth that reduces poverty through investments in areas such as agriculture, education, private- sector development, and capacity building.

Ambassador John Danilovich, chief executive officer of the Millennium Challenge Corporation and former U.S. ambassador to Brazil and Costa Rica, discussed the unique role of the MCC in fighting corruption worldwide with eJournal USA.

Question: What is the role of the MCC in fighting corruption worldwide, and how do the MCC's anticorruption initiatives help fight poverty?

Ambassador Danilovich: MCC is providing a powerful incentive for governments to adopt tough anticorruption policies and strengthen their anticorruption institutions by tying its assistance to how well countries fare on our corruption indicator. To date, our board of directors has approved anticorruption assistance programs totaling more than $200 million with a number of countries, including the Philippines, Ukraine, Moldova, Paraguay, Albania, Tanzania, Malawi, Indonesia, and Zambia, among others. Generally, such programs focus on reforms of tax administration, police, courts, the civil service, agencies tasked with investigating high-level corruption, and government auditing agencies. By working with these countries to address corruption, MCC is strengthening effective governance and making the country more attractive for private investment, which is key to long-term, sustainable economic development in these emerging markets.

Q: The MCC has said that fighting corruption is a main component in fighting poverty. What is the correlation between corruption and poverty?

Ambassador Danilovich: Corruption reduces investment, increases costs, lowers productivity, undermines confidence in public institutions, raises interest rates, limits the development of small and medium-sized enterprises, undermines public financial management, and leads to inferior educational and health outcomes. Corruption can also increase poverty by skewing government expenditure in favor of the rich and well-connected, weakening customs and tax administration, making the tax system more regressive, promoting tax evasion, and rendering the assets of the poor less attractive as collateral for securing loans. The World Bank refers to corruption as "the single greatest obstacle to economic and social development."

Q: Are there any countries in particular that you'd like to highlight as having made strides to remedy corruption within their governments? Through what means did these countries meet their objectives?

Ambassador Danilovich: Since being selected as an MCC-eligible country, Georgia has adopted dramatic anticorruption reforms. These actions have led to a significant improvement in its World Bank Institute's Control of Corruption indicator: from the 36th percentile in 2004 to the 78th percentile in 2005.

In 2002, approximately 37 percent of firms in Georgia reported that "irregular additional payments" were often necessary to get things done. That number declined to approximately 7 percent in 2005. The so-called bribe tax [bribes as a share of annual sales] has also decreased from approximately 2.7 percent in 2002 to 0.5 percent in 2005. The government of Georgia has arrested scores of corrupt public officials, made important legislative changes that facilitate the prosecution of corruption cases, fired 15,000 members of the notoriously corrupt police force, dramatically increased the salaries of 10,000 public servants to counter the lure of petty corruption, and improved public financial management through adoption of a medium-term expenditure framework and a single treasury account for the central government. The World Bank's Doing Business in 2006 report also identifies Georgia as one of the most aggressive economic reformers in the world: "A new licensing law cut from 909 to 159 the number of licensed activities. A one-stop shop was created for license applications, so that now businesses can submit all documents there, with no verification by other agencies required. A simplified tax code eliminated 12 of 21 taxes. And the time to register property fell by 75 percent and the cost by 70 percent." The IFC [International Finance Corporation] claims that Georgia is another example of reform that can be attributed to the MCC.

Q: How are anticorruption initiatives measured? For example, when countries begin to make anticorruption strides, are there certain indicators? What are those indicators?

Ambassador Danilovich: There are various methods to measure the effectiveness of anticorruption initiatives. One can survey firms, citizens, and government officials and ask them about their experiences with corruption. One can evaluate the strength of a country's anticorruption legal framework. One can also measure the government's willingness to investigate and prosecute corruption cases.

MCC primarily relies on the World Bank Institute's [WBI] index for measuring corruption. This index takes into account up to 21 different data sources, depending on availability in the respective countries. One of the advantages of the WBI's index is that it measures the perceptions and experiences of individuals and firms in the country as they relate to corruption. This provides governments with honest feedback from the people living and doing business in their countries, who have firsthand knowledge of the situation on the ground.

For example, one of the sources used by the World Bank Institute is Transparency International's Global Corruption Barometer. In Indonesia, where corruption has plagued the public sector for years, the government finally appears to be turning a corner, and this is showing up in Transparency International's poll. According to the 2005 Global Corruption Barometer, 81 percent of Indonesians believe that corruption will decrease over the next three years. Out of 69 countries surveyed, Indonesia was the single most optimistic country regarding the anticorruption efforts of its government.

Q: What is the "MCC effect" that you have talked about in many of your speeches?

Ambassador Danilovich: MCC's selection criteria are motivating countries to enact reforms they otherwise might not have made in order to become eligible for MCC funding and to maintain that eligibility. Countries are taking it upon themselves to reevaluate their policies, regulations, and legislation to improve their governance, fight corruption, ramp up investments in health and education, and adopt micro- and macroeconomic reforms. We like to call this incentive effect the "MCC effect," and it is widely documented.

According to the Doing Business project at the International Finance Corporation, 24 countries specifically cited the MCC as the primary motivation for their efforts to improve their business climate. The IFC has found that these reforms "can add between a quarter and half a percentage point to growth rates in the average developing economy."

Interministerial committees and presidential commissions have been set up in over a dozen countries to devise reform strategies that address our selection criteria. Presidents and ministers come to us, write to us, ask our ambassadors in the field, "What reforms do we need to make to become eligible for MCC funding?"

These reforms are yielding tangible benefits.

The government of El Salvador, which was inspired by the MCA to reduce the number of days it takes to start a business from 115 days to 26 days, has seen a 500 percent increase in business registration and a sharp spike in customer satisfaction: from 32 percent to 87 percent.

The government of the Dominican Republic has also expressed a great deal of interest in becoming MCA eligible and has set up three working groups to address performance weaknesses in each of the MCA categories: Ruling Justly, Investing in People, and Economic Freedom. Presidential Technical Secretary Temistocles Montás said the following about the MCA selection criteria: "We are embracing these goals because they are the right thing to do. They will constitute part of this administration's legacy to the Dominican people." The government plans to release an MCA Action Plan and launch an MCA-Dominican Republic Web site to highlight the reforms they are adopting to become MCA eligible. Most recently, the government informed MCC that because of its desire to become MCA eligible, it would roll out a large measles immunization campaign that will reach 5 million people.

In Indonesia, Finance Minister Sri Mulyani Indrawati has repeatedly argued that the real draw of the MCA is its "good housekeeping seal of approval," which sends a powerful signal to private investors. As she puts it, "It's not about the money. It's about the recognition that we're doing the right thing." This year, in an unprecedented move, Philippine President Gloria Macapagal-Arroyo matched MCC's $20 million Threshold Program with $19 million in anticorruption counterpart funds. The announcement of the MCA Threshold Program appears to have given the Philippines renewed vigor in fighting corruption.

In the development field overall, other donors are taking note of MCC's approach of funneling resources specifically to performing countries. We see a growing interest among some donors to consider rating systems or report cards—similar to ours—to determine which countries might receive assistance. Providing aid to countries will not work if they are not champions of their own development.