How Can Country Competitiveness Drive Economic Growth?

In announcing the Millennium Challenge Account (MCA) initiative last March, President Bush reconfirmed the commitment of the United States to bring hope and opportunity to the world's poorest people and called for a new compact for development defined by greater accountability for rich and poor nations alike. This initiative challenges developed and developing countries to work together as real partners to establish a new results-based paradigm for economic development. It aims to tackle one of the most vexing problems of our times -- how to support lasting improvements in living standards and reduce poverty in the poorest nations of the developing world.

The Millennium Challenge Account is about providing incentives and seeking results. Development doesn't just "happen," no matter how much money you throw at it. From over 30 years of experience in attempting to spur development growth abroad, we have learned several simple lessons. Development requires economic growth. Economic growth occurs when people and their governments respond to economic incentives. Money is an incentive, certainly. But throwing money at problems without the foundation of sound government policies will not have lasting impact on people's lives. Government mismanagement or outright corruption is an even greater disincentive to development, thwarting the fundamental entrepreneurial spirits of citizens and businesses alike. President Bush's Millennium Challenge Account initiative puts incentives in place to encourage policies that work: first by setting policy- and commitment-based eligibility requirements to qualify for the MCA program; second by providing additional funds; and third by insisting that MCA programs show results by meeting mutually agreed benchmarks and development objectives.

We know that aid alone cannot lead to sustainable economic growth. Most of the developing world already possesses substantial assets that could be mobilized to promote their economic development. For a country to build on its wealth, however, that wealth must stay at home. For this to happen, countries must attract capital and put in place economic incentives to discourage capital flight. Estimates of sub-Saharan African country external assets, for example, exceed the stock of their external debt -- a sure indication of capital flight. The MCA will promote a sound investment climate that can help pull some of this capital back into Africa.

Trade and investment flows dwarf the MCA's $5 billion and the $50 billion given by all donors in official development assistance each year. Developing countries exported close to $2 trillion in goods and services in 2001. Foreign investment flows to and among developing countries amount to $180-200 billion annually. And, of course, the biggest source of capital are the hardworking people of developing countries themselves, who produce goods and services valued at over $6 trillion dollars each year and savings amounting to over $1 trillion. The MCA will provide incentives and practical support to promote the sound economic policies and build the capacity that developing countries need to tap productively these far greater sources of development finance.

The link between development progress and governments that support freer markets, individual liberties, and effective institutions is robust. Sustainable development also takes hold when good governance is joined with a dynamic private sector. A vibrant private sector gives free reign to human creativity, fostering innovation and improving the living standard of everyday people. The most vital resources a country possesses are the skills and entrepreneurial spirit of its citizens. Unfortunately, domestic economic resources and capital have all too often been squandered, sometimes by conflict, but also by economic policies that do not give individual families and firms the proper incentives to save and invest in their future, and to innovate and engage in productive enterprise.

To qualify for the MCA, each MCA candidate will need to encourage economic freedom through good macroeconomic governance, an efficient regulatory system, an open trade regime, and a healthy climate for business investment. The MCA will then help qualifying countries boost their economic growth by providing grants to productivity-enhancing areas such as agricultural development and private enterprise, building trade and investment capacity, and investing in health and education.

President Bush concluded his announcement of the Millennium Challenge Account initiative with a typical Americanism: "The bottom line for us, and for our developing country partners, is how much development they are achieving." The MCA initiative will only succeed if we select partners that have put in place the policies that allow growth to take place, undertake programs that address the key bottlenecks to development, and hold to the agreed benchmarks that measure progress toward achieving agreed objectives. By requiring these policies in order to qualify for MCA funds and tracking the funds through successful development programs, the Millennium Challenge Account will promote incentives for sound economic policies that will result in economic growth and prosperity in the countries that join us in rising to the challenge.

I am glad to see all of you here today, and to see academics, and representatives of non-governmental organizations and the private sector exchanging ideas on how to sculpt the Millennium Challenge Account so that it can be efficient and effective in achieving the goal of economic development. Thank you.