By Nina Easton
November 11, 2011

Poor countries that want money from the Millennium Challenge Corp. pledge to end corruption and embrace democracy. Can this little-known agency change the model for global aid?

FORTUNE — Dole Food Co. has been knocking on his door, but Tony Botchway wasn’t sure he wanted to cut a deal. Five years ago, this Ghanaian farmer could only dream of becoming a supplier to the world’s largest producer of fruits and vegetables. Now he’s producing 4,500 hectares of sweet pineapples and mangoes, and selling them for juicy profits (profits he wasn’t sure he wanted to share) to Spain and Switzerland. His Bomarts Farm has expansion plans that local banks are happy to finance. And he can afford to pay his nearly 750 workers above minimum wage, while providing lunch and free medical care. “We’re ready to compete with Costa Rican producers,” he told me as we stood in front of his new processing plant in central Ghana’s Nsorbi, just weeks before he ultimately decided to ink a deal with Dole (DOLE).

Botchway and his workers have U.S. taxpayers to thank for all this, specifically, a little-known foreign-aid program called the Millennium Challenge Corp., which has poured more than half-a-billion dollars into Ghana alone since 2006. Since its founding in 2004 the agency, which enjoys bipartisan support, has committed some $8 billion to projects in developing countries such as the Philippines, Georgia, and El Salvador.

Some of you are surely rolling your eyes at the thought of more American dollars flowing into foreign lands — taxpayers already provide some $34 billion a year in economic aid through agencies such as USAID. But the MCC program is international aid that capitalists can embrace: The agency’s founding principle is that economic growth is the best antidote to poverty, and so while some money is funneled to schools and hospitals, MCC’s biggest grants, or “compacts,” are aimed at kick-starting private enterprise. In Ghana, for example, the MCC money has been used to train 65,000 farmers, build storage facilities, and pave gutted dirt roads so that they can get fresh produce to markets.

MCC itself takes a businesslike approach to its disbursements. Countries that apply for funds must meet a rigorous checklist. An MCC grant isn’t a blank check — and unlike other foreign aid it is designed to end. “My goal is to replace our money with private sector money,” says Daniel Yohannes, an Ethiopian-born banker from Colorado who was tapped by President Obama in 2009 to run the agency. When I visited Ghana, a digital clock in the local agency office was counting down the days till the end of its five-year compact. After that, it’s pencils down. If Ghana wants more money, it must compete against other countries with a new proposal addressing a new industrial sector. No country has yet received a second compact, though a handful — including Ghana — are in the running.

In contrast to most other foreign-aid programs, MCC grants come with tough strings attached: Only democratic countries with a commitment to economic freedom can compete for the money. Fall down on that and you’re booted — as Nicaragua learned in 2008, when suppressing political opposition in local elections cost the country a $62 million grant. When the Malawi government used violence to quell demonstrators, MCC threatened to halt its $350 million grant.

MCC was the brainchild of former Secretary of State Condoleezza Rice. She says that, going back to her days as national security adviser, she was dismayed by the way agencies such as USAID, the World Bank, and other bloated bureaucracies administered aid, letting corruption and fat overhead siphon off money, or wasting dollars on regimes that suppressed private markets and political opposition, keeping poverty rates high. “I couldn’t defend a lot of foreign aid over the past years, much of which disappeared into the pockets of corrupt foreign leaders,” Rice tells me. In 2002, President George W. Bush, flanked by U2 star Bono, proposed increasing development aid by 50% through what he called a “millennium challenge account.” (Bono later told Rice that he was initially skeptical about the Bush White House’s plans; MCC has since become a program supported by both sides of the aisle, and venture capitalist Alan Patricof, a longtime Democrat, sits on the MCC board of directors.)

The Bush administration also hoped MCC would help it achieve its foreign policy goals. In her forthcoming book No Higher Honor, Rice describes the MCC as a pillar of a broader post-9/11 national security strategy to promote American values abroad. “We were looking at how to build well-governed states that take care of their people. And to do that, foreign aid had to be a two-way street,” she says in an interview. “It had to be transparent.”

MCC’s philosophy is that local ownership ensures that countries have a stake in success. Bush described it as “partnership, not paternalism.” Projects are designed and administered by a coalition of government officials and business, labor leaders, and environmentalists — in an often hotly debated process that acts as its own exercise in democracy, Rice says.

Early results suggest the model is working: Honduran farmers linked to MCC projects have seen their incomes rise nearly 90% in two years; in Armenia, projections say, it’s 150%. Former Ghanaian President John Kufuor, recent winner of the 2011 World Food Prize, gives MCC a big piece of the credit for a decade where per capita income tripled and hunger was dramatically reduced. MCC’s $547 million five-year plan to home-grow a Ghanaian agribusiness industry has enabled farmers to move away from subsistence toward a modern business approach that ensures revenue, not just family supper, Kufuor explains.

MCC recognizes that capitalism needs more than money to thrive, and so it forces grant winners to maintain standards on everything from immunization to education of girls to a strict rule of law — all keys to an egalitarian society where free markets can thrive. In turn, qualifying for an MCC grant has a financial halo effect on countries, or “a kind of a Good Housekeeping seal of approval” for would-be foreign investors, says Patricof, the MCC board member. After MCC made a grant to the African nation of Benin, BollorĂ©, a French conglomerate, followed with a $256 million investment of its own.

With big American bucks on the line, countries like Benin found the motivation to finally clean up tangled property title systems, giving landowners the collateral they needed to access credit. MCC-sponsored business registration centers offer entrepreneurs an incentive to quickly open legitimate, taxpaying companies.

MCC money gives political leaders the backbone to get tough on corruption and reform court systems, two notorious problems that keep foreign investors at bay. When I toured Benin and Ghana, government ministers praised MCC for helping “correct certain behaviors.” (Translation: MCC provided air cover for government efforts to weed out corruption.)

Despite the leverage that money buys, deploying billions of U.S. taxpayer dollars to fight global poverty through economic growth hasn’t been easy — as I learned in Benin.

A zero-tolerance approach to corruption

Other African nations have minerals or diamonds or oil. Tiny Benin, a former French colony of 9 million people, has its port — a gateway for imports traveling to landlocked West African countries. More than half of MCC’s $307 million grant to Benin was aimed at expanding the Port of Cotonou to accommodate today’s supertankers. The construction came in on time and on budget. Ending corruption is a bigger project.

Intolerance for corruption is the sine qua non of MCC dealmaking. Bribery, kickbacks, and other illicit activities can do serious damage to a country’s reputation, erode government treasuries, and scare off investors. In Benin, customs fees have been an easy source of pocket money for customs agents. And the deal with MCC requires that to end. (Benin qualified for a grant because of a better-than-average corruption problem.) Automated systems installed as part of the port expansion are helping. In August, Benin’s newly reelected President Thomas Yayi Boni gave a speech declaring that bribe-takers will be punished.

I arrive in the capital city of Cotonou in September, two weeks after that speech, and it quickly becomes clear that the heat is on him. Customs agents are threatening a strike in retaliation. Yayi, meanwhile, doesn’t want to lose his U.S. grant — nor the opportunity to compete for a second one. He is also, by all accounts, sincerely committed to his anticorruption campaign; lost revenue is pinching his government.

Yayi and his government have taken notice of Fortune’s presence, with ministers opening their doors to make the case for U.S. investment in their country. They’ve also taken note of the arrival of Jonathan Bloom, who oversees MCC’s West Africa grants. Bloom is a soft-spoken Harvard Business School graduate who nonetheless describes himself as a “straightforward, effective hard-ass” — qualities Yayi witnesses firsthand.

During our visit Yayi calls a meeting with his port minister and Bloom to make the case for more MCC money. Bloom has a rigid counteroffer: Benin must complete unfinished business from the first compact, including the meeting of deadlines and ending corruption. Benin can pursue a second compact, but the competition is fierce. “It’s far from automatic,” Bloom says.

The next morning, over breakfast, the port minister, Jean-Michel Abimbola — who also chairs the local MCC board — argues that Benin needs more than MCC’s money; its anticorruption demands “provided a kind of magic potion for the way forward.” Adds Abimbola: “I wish it would not stop at this step, but it has changed laws and behaviors.”

In mid-September, a few weeks after Bloom departs, customs agents respond to Yayi’s anticorruption campaign with two short strikes. But Yayi refuses to back down; the Benin legislature passes — and courts uphold — a ban on customs agents strikes. Anticorruption measures move forward. Officials from the Danish shipping giant Maersk and BollorĂ© tell me they are optimistic that import traffic through Benin will triple in the coming years.

The best antipoverty tool

No one at MCC kids himself that Benin’s battle against corruption is anything but an ongoing operation. But it’s one worth fighting because of its link to job creation — and, thereby, poverty reduction. MCC field workers like to think of themselves as a sort of special ops force of donor aid — a lean, mobile machine that intervenes and then, just as important, leaves. Only two MCC staffers work full-time on the ground in each country, backed by a team of engineers and auditors in Washington. USAID and the World Bank, by contrast, maintain big, stationary units in the countries where they provide aid.

To be sure, MCC doesn’t engage in all the laudable humanitarian efforts that consume much of the USAID budget — coming to the rescue after floods, earthquakes, famine. It doesn’t have a mission to, say, end a killer like malaria, as the Gates Foundation does. Nor are MCC’s architects alone in recognizing the merits of capitalism in combating poverty. The World Bank has long had a private sector arm called the IFC — which partnered with MCC on Benin’s port, among many other projects. The bank’s current president, Robert Zoellick, has convinced pension and sovereign wealth funds to invest in poor developing nations, while promoting innovations like J.P. Morgan-designed (JPM) hedging tools to help emerging agribusinesses manage risks like weather and pricing. “We see our job as creating conditions for markets to flourish, to draw more capital in,” Zoellick tells Fortune.

But MCC dares to promote a view — economic growth as the best antipoverty tool — that is often at odds with much of the donor community, which remains suspicious of capitalism. Economic growth is mentioned only twice in a recent 44-page United Nations report, Paul Farmer, UN deputy special envoy for Haiti, has pointed out. Yet as Farmer noted in a recent Foreign Policy article on Haiti relief efforts, “All humans need money — they need it to buy food and water every day. And no matter how hard the government or the aid industry tries, people will want for all three things until they are employed.”

Helping the world’s poor consumes less than 1% of the U.S. budget. Still, why should strapped American taxpayers continue to pour billions of development aid into poor countries?

Condi Rice, now a professor at Stanford University, is blunt: “Foreign aid is one of the most important parts of diplomacy. We need countries that are responsible. A stable society is not going to become a failed state.” But, she adds pointedly, “every taxpayer ought to be asking, Is it working?” It may be too early to declare MCC’s approach a success, but the tiny agency certainly gives the taxpayer real bang for the buck.

–Additional reporting by Anne VanderMey

This article is from the November 21, 2011 issue of Fortune.

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