Meeting Minutes

Economic Advisory Council March 2021 Meeting Minutes

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March 26, 2021
10:00 am – 12:30 pm
Virtual Meeting


9:45 am Webex conference lines open 
10:00 am – 10:05 am Introduction and MCC Chair Appointment
Tom Kelly, Vice President Department of Policy and Evaluation
Welcoming Remarks
Alexia LaTortue, Deputy Chief Executive Officer
10:05 am – 10:10 am Overview of Meeting
MCC response to EAC recommendations from previous EAC meetings
Mark Sundberg, Chief Economist MCC
10:10 am – 11:00 am Conditions and Channels for Aid Effectiveness
Mark Sundberg, Chief Economist MCC
11:00 am – 11:40 am Sustainability and Resilience
Berta Heybey, Managing Director, Monitoring and Evaluation
11:40 am – 12:20 pm MCC’s Criteria for Partner Country Selection and Eligibility
Dan Barnes, Managing Director, Selection and Eligibility
12:20 pm – 12:25 pm Administrative Next Steps
12:25 pm – 12:30 pm Opportunity for Public Comment
12:30 pm Meeting Adjourns

Call to Order, Introduction, Welcoming Remarks, and MCC Response to EAC Recommendations

Tom Kelly, MCC Acting Vice President for Department of Policy and Evaluation, called the meeting to order and announced Shanta Devarajan as the newly rechartered EAC’s chair.

Alexia Latortue, MCC Deputy Chief Executive Officer, delivered welcoming remarks, highlighting the priorities of the current MCC administration, namely (1) the challenge of addressing a changing climate; (2) the importance of inclusion and the quality of growth in MCC’s analytic and operational work; and (3) greater mobilization of private sector in MCC investment activities.

Mark Sundberg, MCC Chief Economist summarized MCC’s response to earlier EAC recommendations.

Session 1: Channels and Conditions for Aid Effectiveness

The session was introduced by Mark Sundberg who summarized the issues as raised in the Topic Note. Discussion focused on the future course of MCC and addressing constraints to MCC effectiveness and impact, with the following salient points:

Constraints to compact engagement. MCC still has “the right model,” but several members expressed the view that MCC’s practice of limiting compacts to five years for implementation is inadequate to achieve the program development goals in partner countries. The five-year clock constricts MCC’s opportunities to build and sustain relationships, deepen learning from experience, and foster learning and cultural change within government, which can prove self-defeating. Similarly, the practice of limiting the number of sequential country compacts to two is unrealistic and leads to expectations about development goals known historically to take much longer to achieve.

The importance of MCC grant finance. MCC grant support for infrastructure is rare for aid agencies, where financing infrastructure has fallen significantly over the last two decades. This advantage should be used to leverage impact. Different priorities for scarce grant financing were underscored by members to:

  1. “capture externalities” such as combatting climate change or insuring against future pandemics
  2. address priorities around social equity and inclusion
  3. support promising innovation and experimentation for learning purposes
  4. foster in-country institutions to scale-up infrastructure projects, attract private capital, and shore up planning capacity and infrastructure management (reference made to the IFC’s managed co-lending portfolio program)
  5. address cross-border externalities (e.g., watershed management, environmental pollution, ecosystem protection) distinguishing MCC from other agencies

These priorities should help guide and justify MCC’s grant investment allocation alongside the approach to “binding constraints to growth.” Elaborating further, members noted that infrastructure grants are appropriate in areas where private sector investment is infeasible, i.e., non-excludable public goods, or where distributional equity goes otherwise unmet. Critically, grant-financed infrastructure should avoid displacing or substituting for private sector participation and investments. Public-private partnerships, with minimal necessary grant financing, are preferable where possible.

Support to lagging regions.Special attention should be given to regions within countries that are falling behind in growth and human development indicators, but MCC must weigh tradeoffs. Members noted that infrastructure is most often provided to regions that are already growing, compounding inequality. Outmigration does not offset higher poverty in lagging regions, which may require targeted support. But this requires care in weighing tradeoffs: investing in low productivity, low potential regions may sacrifice more effective poverty reduction elsewhere and may slow outmigration which could be the long-run solution.

Related discussion regarding subnational work pointed to important development work of subnational governments (local public health, education, infrastructure) and encouraged MCC to look more deeply at partnering beyond central government ministries. Grants can be helpful here as many local governments cannot take on debt. Opportunities for piloting reform locally, learning, and scaling up to successes nationally are promising.

Analysis and activity at varying geographic scales.Environment and climate objectives imply greater cooperation at the cross-border and regional level. MCC can utilize high-resolution spatial datasets to identify pockets of poverty and low economic growth at a micro-scale. Meanwhile, grants delivered at the sub-national level can free national governments from the tough choices of leveraging debt to support specific, potentially sensitive areas. However, any sub-national efforts must be balanced with the need for country-level ownership.

Addressing the digital economic divide. Members noted that MCC has worked relatively little on the digital economy. Where the digital divide is wide, inequality has been increasing. Lack of financing has left deep gaps in digital access in poor countries, blocking transition to a growing range of economic activity and preventing access to information and technology. This has been sharply exacerbated by the COVID-19 crisis. Three investment priorities were identified: filling connectivity gaps, training for skills and systems maintenance, and digital industry regulation. This area is promising for blended finance and support for public-private partnering. Members urged MCC to explore this further and consider indirect benefits of digital technology for health and education outcomes.

Fostering experimentation. MCC should consider greater experimentation and risk-taking, for example in settings of low-productivity agriculture. How might investment in digital capacity raise local incomes or support capital mobility, human and/or financial? Greater application of spatial data in combination with piloting new models or technologies was recommended. MCC should consider greater risk-tolerance for well-evaluated high-risk, high-return projects.

Collaboration with other agencies. Integrating MCC activities with other USG agencies is complex, with competing budget priorities and incentives. Members expressed that close collaboration might dilute MCC’s advantages and focus and noted that using grants to advance outside objectives, for example to sweeten deals for the Development Finance Corporation, could prove harmful to MCC’s reputation. However, they also noted that, outside the USG, potentially fruitful collaborators include the WTO and other international organizations. MCC grants could aid multi-partner efforts to finance complementary infrastructure that could collectively generate valuable public goods that cannot cover costs with revenues.

It was suggested that MCC consider partnering with agencies that finance central government projects in order to take up what they neglect—the smaller infrastructure projects in poorly served regions. Major cities and trunk lines are where development institutions invest most often invest, overlooking feeder roads and rural services

Session 2: Sustainability and Resilience

This session was introduced by Berta Heybey, MCC Managing Director for Monitoring and Evaluation.

Broadening MCC analytics. Evidence suggests, in achieving long-term growth, countries suffer more from negative shocks than they benefit from positive surprises. This implies the need for more resilient growth paths to weather negative shocks. Such growth paths depend more on shock-absorbing infrastructures, e.g., transport and roads to access markets when local crops fail. Given the effects of the global pandemic, MCC may need to broaden its analytical scope to include remediation, i.e., repairing harm wrought by exogenous shocks. MCC should account for these effects in addition to its traditional efforts to diagnose constraints to growth.

Improved analytics on long term sustainability should be an objective for MCC and may require revisiting MCC’s use of the Hausman-Rodrik-Velasco growth diagnostics model. The value of natural resource endowments and human capital—adjusted wealth measures that are published by the World Bank—should be accounted for in addition to physical capital investments. Research shows that such indicators strongly predict growth and can help characterize the sustainability of a country’s growth path over the long run.

Building on this, MCC should consider the distinction between green infrastructure (e.g., mangroves that protect against damaging storms) versus tradition gray infrastructure. Advantages of green infrastructure are unmistakable, but to account for their benefits will require adjustments to MCC’s typical analytical time horizons. For example, in the small island states of the Caribbean, weather volatility is increasingly severe and estimated income losses average two percent of GDP annually and growing. Analytics should factor this in and consider green infrastructure for sustainable solutions.

Taking this into consideration, opportunities for insurance investments that indemnify losses from low probability, but high-impact shocks may also offer a useful entry point for MCC.

Hurdle rates and discount rates. Some members noted that in the case of climate change, the 10 percent hurdle rate requirement for approving projects is unhelpful and needlessly excludes potentially valuable interventions. Similarly, time discount rates of 10 percent likely do not adequately value benefits that accrue to future generations, particularly relevant in matters of long-run climate related benefits. Many agencies, including in the US, have adopted lower discount rates for cost-benefit analysis. MCC should reconsider its commitment to these essentially arbitrary criteria.

Agriculture. Diagnosing constraints to transition from agriculture to manufacturing and services, in contrast to traditional constraints to growth, can help isolate conditions that matter precisely to rural poverty and help accelerate structural transformation. How can MCC adjust its diagnostic lens to achieve this? Analytics can quickly become granular, focusing on crop type, irrigation, etc. Additional considerations include identifying sources for a nation’s food supply and what implications that carries for diversification. While crop diversity mitigates risk among poor, vulnerable farmers, it sometimes simultaneously reduces their incomes.

Regarding agriculture resiliency, one of the most impactful investments is conversion from rainfed cropping to irrigated agriculture. By contrast, a focus on national food self-sufficiency has typically been a disaster due to serious lack of crop diversification, adding to vulnerability.

Climate Change. In developing country settings, efforts should focus on climate adaptation, less on mitigation. Payoffs to risk-reduction efforts are felt not only today but well into the future with implications for calculating long-run benefits. Finally, properly accounting for indirect or non-market benefits in the climate can more credibly justify comparisons across competing interventions.

Evaluation. Picking up on the first session, MCC’s grant financing should focus on its advantage in addressing externalities, distributional outcomes contributing to inclusion, and experimentation for learning purposes. It is important that the evaluations assess outcomes along these dimensions, and evaluation design be developed to learn about drivers of success in each.

Session 3: MCC’s Criteria for Partner Country Selection and Eligibility

Daniel Barnes, MCC Managing Director for Selection and Eligibility, offered introductory remarks.

Criteria for eligibility. Selection criteria favor countries that are above average across numerous indicators, a well-intentioned effort to motivate well-governed country partners. But often, economic success begets good governance, and as such, MCC may be overlooking opportunities to work in countries where the need is truly greater. Efforts to adjust criteria, however, may be prone to political biases, and as such, MCC’s reliance on independently generated indices to determine performance confers greater objectivity upon MCC’s selection process. More broadly, there is some evidence that the “MCC effect” is operative as countries strive to improve performance in order to qualify for compacts. This argues for considering additional criteria in order to motivate governments to act in formerly undervalued dimensions of inequality and inclusion. Accounting for such measures not only reflects more accurately the nuances of a country’s poverty landscape but may also open up new opportunities for engagement in countries that otherwise do not qualify for MCC support.

Use of income criteria. MCC’s use of strict per capita income criteria generated by the World Bank (e.g., hard thresholds for lower or lower middle- income countries) are arbitrary and should not be followed strictly. One suggestion is to work more with local poverty definitions which are more meaningful in the local context. Another recommendation is to consider income volatility, pushing households in and out of poverty, as a further criterion, with higher volatility providing further merit for support. This will also be relevant for consideration of sub-national candidates for selection if MCC moves in this direction. To this end, a portfolio analysis may prove useful. Given the lag in reporting poverty data and uncertainty that often surrounds household income surveys, it was suggested to also consider non-income measures of poverty, such as access to basic services. One further suggestion was consideration of feasible marginal taxation rates as an indicator of financial need and capacity to self-finance.

Political economy of development assistance. Targeting poor segments in middle- or high-income countries demands political sensitivity; spending taxpayer funds overseas requires strong justifications, particularly when certain aid-recipient countries operate their own aid programs, e.g., India. That said, even upper middle-income countries, for example Equatorial Guinea, host poverty on par with the poorest countries in Africa and should not be neglected. The global development community has a moral obligation to assist the poor in countries where governments or politics fail to serve them. Parallel to this, before embarking on sub-national interventions, MCC should ask why a partner country’s democratic system fails to achieve development goals equitably across different areas or population groups.

MCC might consider a new class of compacts that departs from project-oriented funding and instead directly supports on-going central government efforts to support poorer regions.

Opportunity for Public Comment and Adjournment

No comments from the public were received.

Meeting adjourned at 12:35 pm.