A few weeks ago, in an entry on the Millennium Challenge Corporation (MCC), I mentioned that the only reason why the MCC will ever succeed at changing the face of foreign aid is if it comes to be seen as a reward scheme for good institutional change – not because it provides aid under “good conditions”. While the MCC is in a position where it could achieve this feat, the usual political game is threatening to spoil the idea. [Just to make sure: aid will never achieve anything. The reason why I have some interest in the MCC is because it is the only agency which could tackle the problem of development using institutional incentives, not hand outs.]
The Mercatus Center just published a new issue in its great Policy Series entitled The Challenge Ahead: Maintaining a Focus on Incentives to Enable Development. It is co-authored by Brian Hooks, Daniel Rothschild and myself. We argue that the continued success of the MCC will depend on the ability of the leadership to allow the mission to guide its decisions. The MCC’s mission is to reduce poverty through growth, not through any other means (because other means won't work). The only way to obtain growth is through institutional (and cultural) change enabling entrepreneurs to bet on their ideas, and to guarantee them the rewards of their ventures (this is what the leadership must focus on).
So far, this institutional (and cultural) change has remained elusive for development agencies – either because they had the wrong idea or, even when they had the right one, because they couldn’t find the mechanisms fostering such a change. The MCC is now in a position where it could succeed where other agencies have failed because it is using the institutional incentive lever. I am probably too optimistic on this one, but for now, we can hope for the best.