Economic Advisory Council November 2022 Meeting Minutes

September 30, 2022
10 am-12:30 pm
Hybrid Virtual and In-Person Meeting

Agenda
Time	Activity / Topic
9:45 am	Webex Conference Line Opens
10 am – 10:10 am	Welcoming Remarks Alice Albright, CEO, Millennium Challenge Corporation Overview and MCC response to past EAC recommendations Mark Sundberg, Chief Economist, Economic Analysis Chair: Shanta Devarajan
10:10 am – 10:30 am	Introductory Remarks on MCC in the U.S. Foreign Assistance Landscape and MCC@20 Jake Grover, Senior Policy Advisor, Department of Policy and Evaluation Alicia P. Mandaville, Vice President, Department of Policy and Evaluation
10:30 am – 11:15 am	Open Discussion on MCC@20 and Priorities for the Coming Decade
11:15 am -11:30 am	Coffee break
11:30 am – 12:15 pm	Framing MCC’s Work around Intergenerational Transmission of Poverty
12:15 pm -12:25 pm	Administrative Next Steps Chair: Shanta Devarajan
12:25 pm – 12:30 pm	Opportunity for Public Comment
12:30 pm	Meeting Adjourns

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

Following the call to order, Alice Albright, MCC Chief Executive Office, offered welcoming and introductory remarks. MCC Chief Economist Mark Sundberg described MCC’s response to EAC recommendations from the Spring 2022 meeting.

EAC Chair Shanta Devarajan opened the discussion with a brief introduction on the two topics for discussion, MCC@20 and the intergenerational transmission of poverty (IGTP). A Topic Note on IGTP, circulated in advance, served as additional background for discussion.

Session 1: MCC@20

Senior Policy Advisor Jacob Grover from MCC’s Department of Policy and Evaluation (DPE) offered a background presentation on MCC within the U.S. foreign assistance landscape. Following this, DPE Vice President Alicia Mandaville presented remarks on MCC’s position and future directions as it approaches 20 years of operations.

Infrastructure in MCC’s portfolio EAC members asked clarifying questions about prioritization of infrastructure projects with respect to size, country priorities, and use of grant finance. Separately, one member questioned whether MCC could wield its expertise in infrastructure to complement USAID-style assistance in food, health, and education. Another inquired about MCC’s focus on infrastructure, suggesting MCC allocate scarce grant capital based on where growth and human impact are greatest, not where funds are most readily dispersed.

Members suggested diversifying MCC’s portfolio into efforts in local research and development, particularly in agriculture, given R&D’s large impact on the productivity and incomes of the poor. One member suggested orienting MCC’s infrastructural focus on the needs of rural areas, where most of the poor are concentrated and another suggested pursuing sector-specific infrastructure, e.g., food systems. Infrastructure may be tailored to a high-potential value chain or cluster, creating off-farm jobs in the food sector that make nutrition more affordable and reducing the intergenerational transmission of poverty (IGTP), discussed below. Another member suggested targeting infrastructure investments jointly with local governments, for which funding mechanisms for locally targeted infrastructure are messy and local governments struggle to tap into financial markets. This largely unmet need could be an opportunity for MCC’s model of grant finance for infrastructure.
Accounting for democracy EAC members raised questions about MCC’s scorecard and whether it leaves room for work in countries with “nascent and vulnerable democracies” which may require relaxing the indicators. Specifically, members asked: Can MCC constructively engage such countries without risking a disconnect between government priorities and long-term needs of the population? Can MCC explore new indicators that speak to the potential for success? More broadly, is MCC genuinely committed to serving such partners over the long-term, and can a scorecard truly capture a country’s “democratic character” particularly given the recent decline in democratic institutions worldwide? One member argued further that support for fledgling democracies is very important to the democratization agenda, and MCC should take this more seriously, elevating policy-economy analysis to be on par with growth diagnostics.

Members remarked on the tradeoff between certain investments, e.g., budget support, infrastructure, and policy reforms, that deliver a “democratic dividend,” immediately but arguably less-sustained benefits to fledgling democracies, and the delayed payoffs from education, childhood development, and R&D that sustain long-run growth. MCC should incentivize and reward partner countries that work to achieve democratic goals, but also support long-term payoffs.

Questions arose over tension around “country ownership” i.e., the idea that governments and the populations they represent are committed to a project’s design, implementation, and outcome. This may weigh against MCC’s responsibility for achieving results. How does MCC strike the balance between these competing objectives?
Evaluations and measuring success EAC members asked how MCC defines and documents its success. After nearly 20 years MCC should undertake an independent evaluation of its successes and failures, highlighting where MCC has had the greatest impact, since impact should be the relevant criteria for comparison, and not measures of money spent. Has MCC’s model influenced the practice of aid among other agencies and donors?

Separately, members commented on MCC’s soon-to-expand pool of income-eligible countries and observed that MCC’s success will stem not so much from reaching more countries than securing legislative support and, more broadly, Congressional buy-in, that renders compact timelines and design more flexible. One member was highly supportive and noted that moving to the poorest 125 countries comes close to covering all 136 countries the World Bank classifies as developing. Another member disagreed, noting MCC’s focus on the poorest countries is unique in US foreign aid, and should not be lost.
Climate change, sustainability, and global public goods Given its threat to long-run economic growth, members noted that adaptation to climate change is inevitable and should figure integrally into MCC’s toolkit and investment portfolio, particularly in terms of adaptation strategies. This will require MCC to develop new economic tools and modeling to define how growth takes place while adapting to climate change and reducing systemic risk, which MCC’s use of the Hausman model (HRV) will not address. An additional lens should focus on climate’s effects on women and children, particularly in light of the discussion on intergenerational poverty transmission. Benefits from MCC-led interventions, particularly in terms of reduced negative externalities, should be factored into its investment analyses. More broadly, some members suggested MCC focus more on regional and tangible public goods, e.g., disease outbreak mitigation, power pooling.

EAC members also raised the sub-national implications of climate change, insomuch as effects vary across geography, and pointed to the possibility of working directly with local and regional governments to address issues of adaptation and mitigation. In a similar vein, to the extent that infrastructure investments fall under the domain of local governments, coupling climate smart infrastructure with local governments, often cities, offers an efficient way to target resources to the neediest. Subnational governments are often responsible for sustainable infrastructure investments but lack access to finance. MCC should aim to work with local governments and use blended finance to attract private capital while strengthening local government credit worthiness.

Several members noted, however, that MCC’s adherence to a high discount rate in cost-benefit analysis (ten percent) is a barrier to work on sustainable adaptation to climate change. The practice undermines selection of projects that address negative externalities. Another member noted that a high discount rate is a barrier to investment in R&D where research and appropriation of benefits are medium or long-term.
Environmental quality and poverty Members suggested that MCC more closely integrate pro-poor and pro-green agendas, particularly given MCC’s strength in infrastructure. This potentially manifests in the form of local, small-scale infrastructure for which micro-simulation analyses can be particularly useful. Separately, MCC’s analysis and investments should not stop at climate issues but also recognize the persistent impact of local air pollution, both indoors and out, which remains a leading cause of death in developing countries and disproportionately impacts on women and children’s health. Implications for IGTP, discussed below, are also straightforward.

Session 2: Intergenerational Transmission of Poverty (IGTP)

EAC members discussed the relevance of IGTP to MCC’s mission, the current set of tools at MCC’s disposal to address IGTP, and ideas for better integrating IGTP strategies into its future work.

Local-level initiatives EAC members observed that the challenge of breaking IGTP is often concentrated in lagging regions within a country, noting the importance of geography and suggesting MCC consider more program assistance at the subnational level. However, targeting such regions may run against the economic or political priorities of a national government, raising the question of country ownership. Similarly, smaller infrastructure projects, geared to local government design, operation, and maintenance, often benefit from Community Driven Development funding mechanisms. A challenge with this approach is sustainable financing at the local level: local governments often lack both ability and authority to levy taxes and fund local infrastructure. To work at subnational levels, MCC must consider the financial sustainability of local governments.
IGTP and the pandemic Members commented that the shock of the global COVID pandemic to children’s education likely reversed some of the improvements to IGTP achieved in recent years. MCC should explore how its investments can add resilience to education access and delivery, in addition to investments in health infrastructure.
Multiple drivers of IGTP The benefits of human capital formation, and the ensuing reduction of IGTP, owe much to education and health-specific investments. However, complementary investments in transportation, security, and other public goods can boost participation in education. Girls, for example, attend school more regularly or choose to attend better schools, when their trips back and forth are safe and efficient. Separately, the sustainability of school operation and services matters as much as their initial construction, as well as the actual quality of instruction. The same principles of sustainability and quality apply to health infrastructure. MCC may not be well suited to pursuing human capital investments given the long-run nature of the challenge and MCC’s required 5-year disbursement window. Partnering with donors actively involved with local government and fiscal capacity may be a way around this constraint.
Origins of IGTP and complementarity of inputs to human capital Members underscored the importance of family background and wealth in driving IGTP and stressed the importance of addressing equality of opportunities. Conceived broadly, these opportunities need not be limited to education, but through improved rural linkages, better digital infrastructure, and training in digital technologies. Some members view a multi-dimensional approach to tackling IGTP as unavoidable, marrying public infrastructure to human capital formation in the right combinations to ultimately break persistent patterns of poverty. Additional attention to the likely jobs of the future, the demand for specific skills, the possibilities of migration, and the importance of technology is critical.

Public Comments

Comments received during the public comment period referenced the need to keep the MCC model for selection and economic analysis in mind. The commentator noted that the Constraints Analysis conducted for MCC programs is designed to identify growth-oriented priorities to help partner countries focus their proposals on growth investments, with emphasis on country ownership. Country partners can determine which growth investment is most important for them. Should areas such as agriculture, urban planning, pollution abatement, or education emerge in constraints analysis, these could be prioritized, accommodating EAC member proposals. The commentator also noted that they did not support lowering the ten percent discount rate used by MCC in cost-benefit analysis because mitigation of impacts from climate change has never emerged as a major constraint to growth and is unlikely to be supported by partner countries.

Members Present:

Alan Gelb, Center for Global Development
Allen Blackman, Inter-American Development Bank
Celestin Monga, Harvard University
David Dollar, Brookings Institution
Emmanuelle Auriol, Toulouse School of Economics
Homi Kharas, Brookings Institution
Louise Fox, University of California-Berkeley
Michael Woolcock, World Bank
Nora Lustig, Tulane University
Paul Smoke, New York University
Raquel Fernandez, New York University
Shahrokh Fardoust, College of William and Mary
Shantayanan Devarajan, Georgetown University
Vinod Thomas, National University of Singapore
William Martin, International Food Policy Research Institute
William Masters, Tufts University

Members Not Present:

Augusto de la Torre, Columbia University
Chris Blattman, University of Chicago
David Robalino, IZA
Jeff Vincent, Duke University
Martin Ravallion, Georgetown University
Ravi Kanbur, Cornell University
Rema Hanna, Harvard University
Solomon Hsiang, University of California-Berkeley
Stefan Dercon, University of Oxford