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Honduras Becomes Poster Child for the U.S. Millennium Challenge Corporation

One year ago, in the dark days following the military coup in Honduras, the U.S. Millennium Challenge Corporation (MCC) was forced to terminate $10 million in development aid to the Honduran government due to serious concerns about the country’s commitment to democracy.

A year later, Honduras – under new political management – is back in the United States’ good graces.
Following President Porfirio Lobo’s inauguration in January, the MCC program released its final disbursement of the last $5 million of the Honduras compact, allowing the Central American country to become to first in the world to successfully complete an MCC compact on time and on budget.

With the conclusion of the $205 million aid package – $10 million shy of what was originally budgeted in 2005 – Honduras has now become the unlikely new poster child for MCC success in the developing world.

And despite the “glitch” of last year’s coup and temporary aid freeze, this history did not dampen the festive atmosphere at the Sept. 17 ceremony held in Tegucigalpa.

“The mood is joyous. There is a feeling of success and the results are visible – you can see how we have had an impact in terms of reducing poverty,” Chief Executive Officer Daniel Yohannes told The Nica Times in a phone interview from Tegucigalpa.

Yohannes noted that under the five-year MCC program, 7,400 Honduran farmers were trained to produce cash crops. And of those, more than 6,000 farmers have already reported increased crop yields and nearly doubled profit margins.

Other farmers were given much-needed access to rural credit to increase their production in harvests to come.

The MCC also financed 422 kilometers of rural roads connecting farmers to markets, and 170 kilometers of CA-5 highway and secondary roads throughout the country, according to the MCC’s final progress report.

Over the next 20 years, the MCC’s investment in Honduras is expected to benefit more than 1.7 million people and increase incomes by $240 million.

Yohannes said he felt “touched and energized” to see the impact that the MCC has had on Honduras’ rural poor.

“You could see the results quantitatively and qualitatively and the impact it has had on the population of the country,” Yohannes said.

In a congratulatory note from Washington, D.C., U.S. Secretary of State Hillary Rodham Clinton called the MCC compact a “crucial part of our commitment to work as partners with the people and government of Honduras to reduce poverty and promote effective, sustainable development throughout the country and across Central America.”

Clinton said the MCC compact has “helped lay the foundation for a brighter future for all Hondurans.”
The Honduran government feels the same way.

Vice President María Antonieta de Bográn called the MCC program “one of the most successful projects in the history of international cooperation in Honduras” and “the best example of the friendship and partnership” between the two countries.
 Partners in Democracy
The successful conclusion of the first MCC compact comes as a relief to the U.S. government.

Honduras and Madagascar, two of the first compacts signed by the MCC in 2005, both experienced coups and subsequent suspensions of aid last year. The MCC also canceled the remaining $62 million of its development compact with Nicaragua last year, after the Sandinista government was accused of rigging the November 2009 municipal elections (NT, June 19, 2009).

Of the three countries that had MCC aid suspended in 2009, only Honduras – with its presidential elections last November – has, according to MCC criteria, returned to the path of democracy and good governance.

The $10 million in canceled Honduran aid – earmarked for projects such as vehicle weigh stations and rural roads – forced the MCC to “reduce the scope” of the final phase of its project, according to Jonathan Brooks, the MCC’s resident country director in Honduras.

However, he added, “despite the glitch, the implementation (of the MCC compact) continued to be successful during that period.”
There has been some debate whether the new Honduran government should be recognized by the United States or treated as the illegitimate product of last year’s coup – a position held by left-leaning Latin American countries.

But Yohannes notes that he MCC’s decisions about eligibility are not based on political considerations, but rather on “17 different scorecard indicators” provided by international institutions such as Freedom House, the World Bank and the International Monetary Fund.

Therefore, Honduras’ re-inclusion in the program, as well as Nicaragua’s suspension, have to do with scorecard compliance rather than political fancies, the MCC insists.

Continuity in Times of Change

The conclusion of the MCC compact in Honduras last month is even more remarkable considering the political turmoil that the country has experienced over the past five years: an abrupt shift from right- to left-wing governments, followed by a violent shift back again.

Still, the MCC program, which was designed and implemented by the Hondurans themselves, pushed on through changing political winds.

“The program survived three different administrations,” Yohannes noted. “Despite all the problems, it was completed extremely well and managed by the Hondurans.”

The continuity of the MCC program – in a part of the world not known for political continuity from one administration to the next – is “a testimony that programs like this work because they are owned by the people who designed them.”

Yohannes said that a similar MCC continuity through political change is occurring in neighboring El Salvador, where the left-leaning President Mauricio Funes last year replaced right-wing President Tony Saca.

During a visit to El Salvador last year, the MCC’s acting executive officer Rodney Bent told The Nica Times that the incoming Funes administration had “made it clear that the MCC will continue as an integral part of El Salvador’s national development plan” (NT, May 15, 2009).

A year and a half later, Yohannes reports that the Funes administration has not only continued to implement the $430 million MCC compact, but has strived to make it an even more effective tool for development.

“We have seen it again and again, when one government leaves and the other comes in and the new administration takes the MCC very seriously and wants to make it better,” Yohannes said.

To a certain extent, the same phenomenon also occurred in Washington, D.C. in 2009, when the left-leaning President Barack Obama inherited the MCC model from his right-wing predecessor, George W. Bush.

Instead of abandoning the Bush-era initiative, the Obama administration has worked on expanding and improving the MCC worldwide.

Nicaragua is perhaps the only country where the incoming president has not shared the interest of his predecessor in continuing the MCC program.

When President Daniel Ortega took power in 2007, he blasted the MCC program in Nicaragua as a “big lie and manipulation” and joked that it was going to take a “millennium” to see any results from it.

When the MCC funding for Nicaragua was eventually terminated after the contested elections, Ortega announced the U.S. aid would be replaced by a $50 million “ALBA Solidarity Fund.”

Fifteen months later, the ALBA Solidarity Fund remains an empty promise.

 A New Model of U.S. Aid

Though still a relatively new program, the MCC is helping to redefine the way the U.S. government partners with developing countries. And despite being a Bush administration initiative, the MCC has proven to be more of a carrot than stick approach in terms of “encouraging” other nations to make reforms and other concessions.

“We leverage investment to get some concessions in terms of policy reform, which creates an environment that is extremely attractive for businesses to flourish,” Yohannes told The Nica Times. “We are not only building roads, but demanding that countries set aside some funds so that they have enough to maintain the roads in the long term.”

In Honduras, for example, the MCC required the Honduran government to increase its annual road maintenance funding from $37 million in 2005 to $64 million in 2010.

The idea, Yohannes said, is to get the countries to take ownership in the projects and think about them in terms of long-term national interest.

“We are working in collaboration with countries to get them to think differently in the long term, because you cannot bring economic prosperity in the short term,” he said.

The MCC, therefore, not only plays an important role in terms of providing funding for development projects, it also plays “a major role in terms of policy reform,” Yohannes said.

That ensures that MCC countries become better U.S. allies in the future, Yohannes said.

“In the long term, they are better allies because they are in better sync with our system and that creates tremendous opportunities for American businesses, should they want to expand in those countries, because they will have rules and protections for some of the investors who might want to go there,” the MCC chief said.

Since its inception in 2004, the MCC has approved more than $7.5 billion in poverty reduction compacts and policy improvement “threshold programs” in 43 countries worldwide.

The next compact scheduled for completion in October is the five-year, $110 million compact with the African island nation of Cape Verde.

In Central America, the $175 million Nicaraguan compact, which was reduced by $62 million, is scheduled to wrap next year.

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