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Lecture #920 on Trade and Economic Freedom

January 13, 2006

Promoting Economic Prosperity Through the Millennium Challenge Account

By

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[1]Organisation for Economic Co-operation and Development, International Development Statistics.

[2]U.S. Department of State, "The U.S. Approach to International Development: Building on the Monterrey Consensus," September 12, 2005, at www.state.gov/r/pa/scp/2005/53037.htm.

[3]Organisation for Economic Co-operation and Development, International Development Statistics.

[4]"President Proposes $5 Billion Plan to Help Developing Nations," Remarks by President George W. Bush on Global Development, White House, Office of the Press Secretary, March 14, 2002, at www.whitehouse.gov/news/releases/2002/03/20020314-7.html.

[5]"Ends Without Means," The Economist, September 11, 2004, p. 72.

[6]Indeed, nearly every country in sub-Saharan Africa improved in life expectancy, literacy, maternal mortality, and infant mortality (all of which are MDG indicators) from 1970 to 1990. Yet few countries experienced increased economic growth and development. World Bank, World Development Indicators 2005.

[7]Organisation for Economic Co-operation and Development, International Development Statistics, at www.oecd.org/dataoecd/50/17/ 5037721.htm (September 14, 2005), and World Bank, World Development Indicators 2005, at www.worldbank.org/data/onlinedatabases/ onlinedatabases.html (September 14, 2005; subscription required).

[8]This figure actually understates external contributions to development by ignoring private-sector contributions to development. This oversight not only dramatically underestimates development resources, but also ignores the most effective resources. As observed in the U.S. Institute of Peace's American Interests and UN Reform, "Most resources for economic development and sustainable poverty reduction come through trade, private financial flows, international charitable organizations and expatriate remittances. The 0.7 percent of GDP tar­get would be more meaningful if other contributions relevant to development were incorporated into this calculation, including private charitable donations." Using such a calculation, the U.S. Agency for International Development estimates that total U.S. assistance to developing countries may have been five times its official development assistance in 2000. Other efforts to measure contributions to devel­opment, such as the Commitment to Development Index, which ranks the U.S. twelfth out of 21 nations, similarly portray U.S. contri­butions more positively than a simple measure of government assistance as a percentage of GNP. See U.S. Institute of Peace, American Interests and UN Reform: Report of the Task Force on the United Nations (Washington, D.C.: U.S. Institute of Peace, 2005), p. 107, at www.usip.org/un/report/usip_un_report.pdf (September 14, 2005); U.S. Agency for International Development, Foreign Aid and the National Interest: Promoting Freedom, Security, and Opportunity (Washington, D.C.: U.S. Agency for International Development, 2002), p. 131, Table 6.1, at www.usaid.gov/fani/Full_Report--Foreign_Aid_in_the_National_Interest.pdf (September 14, 2005); and Center for Global Develop­ment, Commitment to Development Index, at www.cgdev.org/section/initiatives/_active/cdi (September 14, 2005).

[9]Organisation for Economic Co-operation and Development, International Development Statistics, at www.oecd.org/dataoecd/50/17/ 5037721.htm (September 14, 2005), and World Bank, World Development Indicators 2005, at www.worldbank.org/data/onlinedatabases/ onlinedatabases.html (September 14, 2005; subscription required).

[10]GDP data before 1950 were not available or were subject to question. GDP data for the other Marshall Plan recipients were not available. This is unlikely to change the overall picture, however, as France, Germany, and the U.K. were by far the largest recipients of Marshall Plan funds.

[11]Craig Burnside and David Dollar, "Aid, Policies, and Growth," World Bank, Policy Research Department, Macroeconomic and Growth Division, June 1997, and World Bank, Assessing Aid: What Works, What Doesn't, and Why (Washington, D.C.: World Bank, 1998).

[12]Other studies arrive at similar conclusions. For example, economists Richard Roll and John Talbott support this conclusion with evidence that the economic, legal, and political institutions of a country explain more than 80 percent of the international variation in real per capita income between 1995 and 1999 in more than 130 countries. Richard Roll and John Talbott, "Developing Countries That Aren't," unpub­lished manuscript, University of California at Los Angeles, November 13, 2001, p. 3. Other comparable studies include Paul Collier and Jan Willem Gunning, "Why Has Africa Grown Slowly?" Journal of Economic Perspectives, Vol. 13, No. 3 (September 1999), pp. 3-22; Robert J. Barro and Xavier Sala-i-Martin, Economic Growth (New York: McGraw-Hill, 1995); Jeffrey D. Sachs and Andrew Warner, "Economic Reform and the Process of Global Integration," in William C. Brainard and George L. Perry, Brookings Papers on Economic Activity, 1995 (Washington, D.C.: Brookings Institution Press, 1995), pp. 1-118; and David Dollar, "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985," Economic Development and Cultural Change, Vol. 40, No. 3 (April 1992), pp. 523-544.

[13]William Easterly, "Can Foreign Aid Buy Growth?" Journal of Economic Perspectives, Vol. 17, No. 3 (Summer 2003), pp. 23-48, at www.nyu.edu/fas/institute/dri/Easterly/File/EasterlyJEP03.pdf (September 21, 2005).

[14]U.N. Millennium Project, Overview Report, 2005, p. 19, at www.unmillenniumproject.org/reports/index_overview.htm (September 21, 2005).

[15]Jeffery D. Sachs, The End of Poverty: Economic Possibilities for Our Time (New York: Penguin Press, 2005), pp. 298-300 and 309.

[16]William Easterly, "Reliving the 50s: The Big Push, Poverty Traps, and Takeoffs in Economic Development," Northwestern University, Kellogg School of Management seminar, June 1, 2005, at www.kellogg.northwestern.edu/finance/faculty/seminars/easterly_william.pdf (Sep­tember 21, 2005). Emphasis added.

[17]Raghuram G. Rajan and Arvind Subramanian, "Aid and Growth: What Does the Cross-Country Evidence Really Show?" National Bureau of Economic Research Working Paper No. 11513, abstract, July 2005, at papers.nber.org/papers/w11513 (September 14, 2005).

[18]Raghuram G. Rajan and Arvind Subramanian, "What Undermines Aid's Impact on Growth?" National Bureau of Economic Research Work­ing Paper No. 11657, abstract, October 2005, at www.nber.org/papers/w11657.

[19]Paul Collier and David Dollar, Globalization, Growth, and Poverty: Building an Inclusive World Economy (Washington, D.C.: World Bank and Oxford University Press, 2001), p. 5.

[20]David Dollar and Aart Kraay, "Trade, Growth, and Poverty," World Bank, Development Research Group, abstract of draft, March 2001, at www.worldbank.org/research/growth/pdfiles/Trade5.pdf (September 14, 2005).

[21]Easterly, "Reliving the 50s," p. 29.

[22]See Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2005 Index of Economic Freedom (Washington, D.C.: The Heritage Foun­dation and Dow Jones & Company, Inc., 2005), at www.heritage.org/index (September 21, 2005).

[23]Marc A. Miles, "Introduction," in Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2004 Index of Economic Freedom (Wash­ington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2004), p. 21.

[24]There are no "free" economies in sub-Saharan Africa, although Botswana ranks among the 40 freest economies and continues to improve steadily.

[25]John Bolton, U.S. Ambassador to the U.N., open letter on the draft outcome document, August 30, 2005, at www.un.int/usa/ reform-un-jrb-ltr-dev-8-05.pdf (September 14, 2005).

[26]The median for each indicator is calculated from the indicator values for all countries in the same per capita income group.

[27]For fiscal year 2006, low-income countries with a per capita gross national income of $1,575 or less and lower-middle-income countries with a per capita GNI between $1,575 and $3,255 or less are eligible for MCA assistance. In previous years, only low-income countries were considered. The median scores for each income group will be computed separately. For FY 2006 there were 69 low-income countries and 29 lower-middle-income countries identified as candidates for MCA grants. Millennium Challenge Corporation, "Report on Coun­tries That Are Candidates for Millennium Challenge Account Eligibility in Fiscal Year 2006 and Countries That Would Be Candidates But For Legal Prohibitions," at www.mca.gov/countries/candidate/FY06_candidate_report.pdf.

[28]On May 6, 2004, the board of directors announced 16 eligible countries for 2004 (Armenia, Benin, Bolivia, Cape Verde, Georgia, Ghana, Honduras, Lesotho, Madagascar, Mali, Mongolia, Mozambique, Nicaragua, Senegal, Sri Lanka, and Vanuatu) and dispatched teams to educate these countries about the MCA and the proposal process. On November 8, 2004, the MCC identified 16 eligible countries for 2005. (Morocco was added for 2005, and Cape Verde was dropped because its per capita income exceeded the legislated threshold, although in 2006 it should be eligible for MCA grants as a lower-middle-income country.)

[29]Thirteen countries have been identified as threshold countries-seven countries for 2004 Threshold funding (Albania, East Timor, Kenya, Sao Tome and Principe, Tanzania, Uganda, and Yemen) and six countries for 2005 (Burkina Faso, Guyana, Malawi, Paraguay, Philippines, and Zambia). Millennium Challenge Corporation, "Threshold Program," at www.mca.gov/countries/threshold/threshold_guidance_en_FY05.shtml.

[30]Millennium Challenge Corporation, "Report on Countries That Are Candidates for Millennium Challenge Account Eligibility in Fiscal Year 2006 and Countries That Would Be Candidates But For Legal Prohibitions."

[31]Millennium Challenge Corporation, "Threshold Countries," at www.mca.gov/countries/threshold/index.shtml.

[32]Millennium Challenge Corporation, "Summary of the Millennium Challenge Compact with the Republic of Cape Verde," at www.mca.gov/ about_us/congressional_notifications/071205-cn_CapeVerde.pdf.

[33]Millennium Challenge Corporation, "Summary of the Millennium Challenge Compact with the Republic of Madagascar," at www.mca.gov/ about_us/congressional_notifications/042605-cn_Madgascar_compact.pdf.

[35]World Bank, Doing Business in 2006: Creating Jobs (Washington, D.C.: World Bank, 2006), pp. 95-97, and Doing Business in 2004: Under­standing Regulation (Washington, D.C.: World Bank, 2004), pp. 118-120.

[36]George W. Bush, "A New Compact for Development in the Battle Against World Poverty," March 22, 2002, at http://usinfo.state.gov/journals/ itgic/0402/ijge/gj01.htm.

[37]Marc A. Miles, ed., The Road to Prosperity: The 21st Century Approach to Economic Development (Washington, D.C.: The Heritage Founda­tion, 2004), p. 8.

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