MCA Monitor Blog

As the CEO of the International Housing Coalition (IHC) I would like to thank you for providing the link to our recent paper, "Urban Investments and Rates of Return: Assessing MCC’s Approach to Project Evaluation".

As the paper argues, we believe international donors and developing nations should be giving special attention to the needs of rapidly growing cities for housing, slum upgrading and urban infrastructure. The reasons for doing this are compelling to us and go beyond pure sectoral interests. Housing and infrastructure investments have high rates of economic return, but more importantly they support and foster economic growth, SME development and job generation; they make important contributions to improving health including HIV AIDS and malaria and they ameliorate some of the negative externalities associated with slums. Housing and related urban investments are essential components of an effective and holistic anti poverty strategy and program.

Assistance from the Millennium Challenge Corporation affords developing countries the unique opportunity to address critical development issues at scale. We think that the program has not been used as strategically as it might have been to address the problems of urbanization and poverty. The IHC hopes to convince policy makers in the developed and developing world that the problems of housing and urban development should rank high on the list of priorities.

To learn more about the policy positions of the IHC go to www.Intlhc.org

Bob Dubinsky, IHC

MCC is always pleased when outside observers take the time and effort to review both our procedures and our programs, as we believe we can always benefit from such interest and scrutiny. In this spirit, we welcome the report written by International Housing Coalition (IHC). We encourage people to read the paper, as it provides a nice presentation of the reasons why urbanization needs to be seen as a positive and natural feature of economic growth, rather than a process to be feared or avoided. Martin Ravallion at the World Bank published an informative article in the IMF’s “Finance and Development” publication in September last year that describes the strong and positive relationship between this urbanization process and poverty alleviation (http://www.imf.org/external/pubs/ft/fandd/2007/09/ravalli.htm).

The IHC report is directed at MCC, but raises an important issue that is relevant not just for us, but for other donors, as well – do countries focus too much on anti-poverty programs directed at rural areas, where most of the poor live? We suspect that the IHC’s affirmative answer to this question may be right in some cases. We agree with the IHC that global patterns of transformative growth include urbanization, as people are pulled out of agriculture into higher wage-paying jobs. MCC encourages countries to examine their economies to identify critical bottlenecks that impede investment and growth, and we fund investments that would relax these constraints, many of which are found, as noted in the IHC report, in urban areas.

However, we also know that rural economies in many countries are themselves highly distorted, with poor policies, institutions and infrastructure. Where countries are prepared to attack these challenges, MCC is prepared to assist them in rural-focused investments that will generate significant new investments that also have the ability to raise incomes and reduce poverty. MCC has been clear in communicating to partner countries and interested observers that we will not suggest a sector preference. Instead, MCC’s model of development places great emphasis on our partner countries’ responsibility to identify for themselves the most significant impediments to growth and to establish for themselves their investment priorities accordingly.

The IHC is hardly the first interested party to try to infer MCC preferences from the composition of our investment portfolio, but this well-intentioned analysis leads to the wrong conclusions because it undervalues the role of our country partners’ preferences. MCC asks that interested observers remember that MCC’s model provides considerable flexibility for countries to construct their own growth priorities, and it is not MCC’s role to suggest projects that have not been identified by countries given those priorities.

The IHC report devotes a lot of space to evaluating our technical approach to project assessment (our Economic Rates of Return, or ERRs), but incorrectly identifies our methodology as a major reason that more urban projects are not funded. As the report itself indicates, well-designed urban investments are likely to generate acceptable ERRs. Given this, our technical review process would find acceptable the kinds of projects the IHC supports when countries include these in their proposals. To the extent that MCC has not funded more high-return urban investments, this is solely the result of countries not having proposed more of such investments to us, and is not connected to our project appraisal methodology.

Again, let me express MCC’s appreciation to the IHC for investing its resources in this analysis and drawing attention to our work. From our discussions with IHC staff and consultants, it is clear that we share a common interest in seeing that MCC funds are invested in ways that will accelerate growth. We also share an understanding that urban investments represent a real opportunity for many developing countries to accomplish that aim. And we will continue our discussions with the IHC and others as to how we can make sure that our programs represent high-quality investment packages that will generate growth according to our country partners’ priorities.

Franck Wiebe
Chief Economist
Millennium Challenge Corporation

This report is a very important one as it address the concerns of the urban populations whereas in the past support seems to go to the agro areas. The growth of third world urban areas has cause for concern regarding all issues from poverty to pollution.