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On Tuesday, MCC signed a $277 million compact with El Salvador.  It’s been a long road to the finish line for El Salvador with over a year-long wait between compact approval and signing (most countries sign within a month of approval).  There’s a lot to like about the compact, including a coherent overriding objective of improving the investment climate and a substantial contribution of the government of El Salvador’s own resources.  The compact also represents a large, concrete contribution to the Partnership for Growth with El Salvador.

Before delving into the compact, I’d like to clear up some possible misconceptions about why MCC—an agency that targets its assistance to relatively well-governed countries—chose to work with El Salvador.  Despite the inaccurate claims in a recent Wall Street Journal opinion piece, El Salvador has fully met MCC’s policy performance criteria (as measured by a scorecard made up of 20 policy indicators) for years (keep in mind that in any given year only about a third of the 80 or so developing countries MCC considers for eligibility pass this governance test—it’s not a particularly easy hurdle).  No, that doesn’t mean El Salvador has flawless governance, and certainly the country does demonstrate relatively weaker performance on the Rule of Law indicator (which measures many of the things that El Salvador observers tend to voice concerns about, e.g., crime, money laundering).  But MCC’s mandate is also to work with developing countries which, as a whole, have somewhat greater challenges with institutional strength than do rich countries.  They key point is that MCC assesses relative policy performance, and among the cohort of lower middle income countries, El Salvador looks pretty consistently good.

So given that, let’s turn to the compact.  There’s a lot to like:

  • Government co-financing signals commitment to compact objectives.  MCC requires that lower middle income countries with a second compact contribute from their own funds at least 15 percent of the compact value.  The government of El Salvador has gone above and beyond, committing to contribute $88 million—over 30 percent of the value MCC is investing. 
  • It’s focused…on improving conditions for the private sector.  The El Salvador compact is not a single-sector compact like the last few MCC has developed (Ghana—power, Georgia—education, Zambia—water), but it nevertheless makes a fairly neat package with a coherent overriding objective: strengthening the business climate.  MCC compacts have been more streamlined for a few years now, but this heightened attention to focus is worth highlighting again as an example of MCC taking to heart lessons learned from its early years when countries sometimes struggled to implement diffuse, complex agreements.  If well-implemented, the El Salvador compact’s investments and the government’s accompanying regulatory, administrative, and programmatic contributions should help invigorate private investment (and perhaps address some of the business climate concerns that prompted the aforementioned WSJ author to have an unfavorable view of El Salvador).
  • It’s a concrete action under the Partnership for Growth.  Though PfG was launched to much fanfare in 2011, there’s not a lot of evidence that it’s shifted US assistance significantly in response to the US-partner country jointly developed strategies.  The compact, however, does concretely address a number of key areas identified in the El Salvador Joint Action Plan.

I’ll look forward to watching the compact unfold.  In particular, I’ll look for the economic rates of return for the compact activities (how cost-effectively will MCC investments help improve El Salvador’s investment climate?) and I’ll look forward to tracking El Salvador’s progress—in terms of both project implementation and the completion of accompanying regulatory and policy reform conditions—as the compact gets underway.

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.