A New Approach to U.S. Development Assistance in Central America: Lessons from El Salvador

By: Aaron Voit

In 2014, tens of thousands of unaccompanied minors poured across the Southern Border of the United States to escape violence and poverty in their home countries. More than three-quarters of the over 60,000 children apprehended at the border came from the Central American countries of Guatemala, El Salvador, and Honduras. In response to the unprecedented wave of immigration from Central America, the White House announced last month that it would ask Congress for one billion dollars in foreign aid for the region. While the current political climate on the hill draws into question the prospects of a budget proposal tripling the amount of money flowing to Central America, the announcement signals an opportunity to reassess and rethink U.S. policy and development goals for the region.

Selectivity, Conditionality, and Interagency Coordination

The new push for development assistance is likely to fit into the Obama Administration’s greater policy framework for international development, which calls for a more “integrated comprehensive approach” among U.S. governmental actors. In 2010, President Obama set forth a sweeping new approach to international development (only made public in early 2014 after a lengthy FOIA lawsuit). This approach, known as the Presidential Policy Directive on Global Development (PPD-6), elevates “sustainable development” as a “strategic and economic imperative” for “national security” and “American power,” at home and abroad. The Presidential Policy Directive seeks sustainable development through the use of “conditionality and performance-based mechanisms” to incentivize policy reforms in “select countries and subregions” where political and economic conditions are “right to sustain progress.”

Obama began piloting these new selectivity and conditionality principles under the framework of Partnership for Growth (PfG) in four emerging market economies around the world, including the Central American country of El Salvador. The PfG engages foreign governments to coordinate development objectives with U.S. aid agencies through a Joint Country Action Plan that implements PPD-6 principles to remove constraints to “broad-based economic growth” by “leverag[ing] the private sector.” Through selectivity and conditionality, PfG aims to facilitate pro-development conditions that can bring to the development table the deeper pockets of non-aid, private sector actors.

Nowhere is this more apparent than in the Millennium Challenge Corporation (MCC), an independent U.S. government foreign aid agency. The MCC’s legislative mandate is to “reduce global poverty through economic growth.” It does this by prioritizing aid to countries that demonstrate positive performance on policy indicators. Ex post rewards for improvement on performance-based country scorecards, most often in the form of several hundred million dollar compacts, induce what MCC terms the MCC Effect: “the incentive created for countries to adopt legal, policy, regulatory, and institutional reforms related to MCC eligibility criteria.” However, as evidenced in the recent compact with El Salvador, the MCC Effect has extended beyond eligibility criteria and MCC’s mandate, undermining established legal mechanisms for international cooperation and calling into question the meaning of the whole-of-government approach set forth in PPD-6.

The El Salvador Case: Private Public Partnerships and Free Trade

El Salvador and MCC signed their second compact in September of 2014, a year after MCC’s Board of Directors originally approved the compact. The compact is worth $365 million and expected to leverage significant additional private investment. Leading up to the Board’s approval, MCC conditioned aid on reforms targeting crime and insecurity and fostering a more conducive investment environment. However, despite performance-indicator progress and specific reforms on these issues sufficient for MCC’s Board to approve the compact in September of 2013, the U.S. government continued to push for additional legal reforms to the already once-reformed Public-Private Partnership (PPP) Law and a successful government food security program. Never before had the MCC Board approved a compact, then stalled so deliberately on its signing and ratification. This unprecedented conditionality process demonstrates the potential of America’s new “integrated comprehensive approach” to development assistance and also reveals serious dangers to bilateral cooperation and the rule of law.

In May 2013, amidst intense debate and public discourse, El Salvador’s legislature unanimously approved a new PPP Law to increase foreign direct investment and streamline private sector involvement in public goods and services. The new law addressed U.S. concerns about constraints to international investment and, for the first time in El Salvador’s tumultuous history, laid a foundation for partnership with the private sector achieved through the political process and grounded in the rule of law. This partnership is embodied in the Council for Economic Growth, a Salvadoran entity with public and private representation created by the PfG to provide private-sector involvement in economic reforms. Notwithstanding MCC Board approval of the compact several months after the enactment of the new PPP Law, the Council for Economic Growth persisted with demands for additional modifications to the law. New reforms proposed to transfer PPP regulation from an independent oversight agency to a new agency created to attract investment and promote export, as well as to limit the National Legislative Assembly’s involvement in the PPP approval process. In spite of significant push back, the Legislative Assembly approved the major substantive elements of these additional modifications.

The PPP reform process showcases the “new operational model” and “modern architecture” of PPD-6 that capitalized on interagency coordination to push for recipient country ownership of reforms and hold foreign governments accountable to reform promises even after the U.S. commits to development assistance. There are legitimate concerns about reforms that expose governmental decision-making to increased private sector influence while weakening the Legislative Assembly’s role in the process. Nonetheless, the PfG increased Salvadoran institutional capacity to engage the private sector in economic reform and the MCC incentive of ex post rewards provided the political will necessary for real policy reform. Ultimately, however, it was the Salvadoran political process, with the legislature leading the way through open debate and overwhelming bipartisan support that decided PPP reform was in the best interest of the country.

Unlike the PPP Law reform process, the attempted reform to government seed procurement demonstrates the dangers of this new model to bilateral cooperation and the rule of law. The Family Agriculture Program, a relatively modest Salvadoran government food security program, procures certified corn and bean seed from domestic producers to distribute to small-scale farmers throughout the country so rural families can have adequate and nutritious food. An open, competitive, and transparent procurement yields high quality seeds at a cheaper price from domestic producers, traditional agribusiness and rural cooperatives alike. Government procurement of domestic seed has resulted in record corn production and generates more than one million daily wages each year in rural areas where local economies rely almost entirely on agriculture.

Capitalizing upon the opportunity to condition the pending MCC compact, the U.S. Embassy called into question the legality of the seed program, citing section 9.2 of the Central American Free Trade Agreement (CAFTA). This section stipulates that governments must give equal consideration to international and domestic providers in the procurement of goods and services. Though clearly an issue acknowledged through El Salvador’s bi-lateral trade relationship housed with the U.S. Trade Representative (USTR), MCC conditioned the compact on reforms to El Salvador’s seed procurement process that would accommodate transnational agribusiness companies like Monsanto and Pioneer. This seemingly contradicted MCC’s own mandate to reduce poverty, their El Salvador country performance scorecard, and, ironically, the competitive nature of the seed procurement.

Although pressure from government and civil society forced MCC to drop its demand, the conditionality of seed procurement reform was surprising given that agriculture and food security are not part of the activities included in the MCC compact—nor were they part of the compact negotiations. In fact, MCC’s own country performance scorecard already listed El Salvador as having met and maintained satisfactory performance under its “Free Trade” standard. While the USTR sits on the MCC Board of Directors, that does not change the mandate of MCC—to reduce poverty through economic growth, not to enforce free trade agreements. Unlike in the PPP reform process, the Council for Economic Growth did not signal that seed acquisition was a priority. Demands that work around recipient-country development institutions to undermine a government food security program don’t belong in U.S. foreign aid, particularly when those demands circumvent established CAFTA enforcement and compliance mechanisms.

Conclusion

The PPP reform process highlights the potential of increased interagency coordination and conditionality to build capacity in foreign governments and foster country ownership of policy reforms. Although the PPP reforms demonstrate the viability of a new development model, however, questions remain whether the specific reforms encourage economic growth at the expense of El Salvador’s democratic institutions. The seed procurement reform process stands in stark contrast, a warning about the dangers of conflating conflicting agency missions to impose conditions that undermine existing legal dispute resolution mechanisms and work against the very purpose of the PPD-6 to achieve “broad-based economic growth.”

As tens of thousands of Central American immigrants stream across the Southern Border, the Obama Administration promises a different approach to foreign aid. In an editorial in the New York Times, Vice President Biden stressed to the nation that “confronting these challenges requires nothing less than systemic change, which we in the United States have a direct interest in helping to bring about.” In El Salvador, U.S. development assistance has worked to strengthen the investment climate and encourage much needed foreign direct investment. But it has also threatened the food security and economies of rural communities, fueling the cycles of violence and poverty that send immigrants north in search of opportunity.

Will future U.S. development assistance toward Central America embrace a new approach that uses selectivity, conditionality, and interagency coordination to build foreign government capacity and increase recipient country ownership of reforms that foster “broad-based economic growth?” Or will this new approach simply allow non-development interests to side-step recipient-country democratic institutions and established legal mechanisms for bilateral cooperation to push the U.S. macroeconomic agenda under the guise of foreign aid?

Aaron Voit is a J.D. candidate at Berkeley Law.  He is a student contributor to Travaux.

 

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