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January 2006
Vol. 2 Issue 1
Recent Events
MCC in the News
Notable Quotable
“The significance and essence of the Millennium Challenge program is to support those countries which demonstrate good governance, and unwavering commitment to invest in human resources and in the principles of democracy and a liberal economy. Nevertheless, we are very aware that the decision of the Millennium Challenge Corporation is not irreversible, and we have much to do to assure our continuous and complete inclusion in that program. By taking into serious consideration the concerns expressed by MCC President Ambassador John Danilovich in his letter to the President of the Republic of Armenia, we wish to reaffirm our commitment to those fundamental principles which are essential to qualify for MCC assistance. Deeply aware that we have serious work to do to implement reforms in Armenia, we are determined to respond to all the issues raised in the letter.”
Statement by Armenian Ministry of Foreign Affairs
December 22, 2005
Ask the Expert
January Expert: Dr. Andrew Warner
Andrew Warner is the Senior Economist at the Millennium Challenge Corporation where he is responsible for guiding the economic analysis. Prior to this, he was a Research Fellow at Harvard University's Center for International Development and the Harvard Institute for International Development. He was also a visiting scholar at the National Bureau of Economic Research and the Center for Global Development in Washington, DC. More
Response from December Expert Felipe Manteiga: here
Term of the Month:
Economic Rate of Return (ERR)
MCC analyzes the likely impact on economic growth of its programs by analyzing whether the proposed programs are consistent with international evidence on drivers of economic growth and by use of economic rate of return (ERR) analysis. Although many are familiar with the concept of an economic return, for the sake of clarity consider the following simplified example. If a program proposes an expenditure of $100 million, and an expected increase in incomes of $150 million, we say that the program has an economic rate of return (ERR) of 50 percent ((150-100)/100) = 50 percent.
The essence of such an analysis is a straightforward comparison of costs and benefits, where the costs are the MCA grants and the benefits are increases in incomes in recipient countries. In other words, MCC analyzes proposals as investments, but the payoffs go to countries rather than to MCC. The ERRs are indicators of the economic growth impact because growth is by definition an increase in incomes and the ERRs measure increases in incomes.
The ERRs also measure the impact on poverty reduction when the targeted beneficiaries of the projects are poor because the increases in incomes in question are incomes of poor people.
MCC's policy is to have no preference over sectors and the use of economic rate of return analysis does not necessarily favor any particular sector such as infrastructure, agriculture or health. Many of the projects proposed to MCC during the first two years have been in agriculture and infrastructure, and some have concluded that MCC therefore favors projects in these areas. This is not MCC's preference and the economic analysis applied by MCC does not discriminate against important social investments. To the contrary, in some cases, infrastructure and agriculture projects can actually have quite low returns, and health and education projects can have high returns. Annex 1 of the new ERR guidelines describes three examples of health and education projects with high economic returns.
Click here for more information on ERR guidelines.
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