Economic Advisory Council Fall 2024 Meeting Minutes

September 27, 2024
10 am-12:30 pm
Hybrid Virtual and In-Person Meeting

Time	Activity / Topic
9:45 am	Webex Conference Line Opens
10 am-10:20 am	Call to Order Shanta Devarajan, Chair Welcoming Remarks Alice Albright, CEO Overview of Meeting Arif Mamun, Acting Chief Economist
10:20 am-12:15 pm	Zooming Out: MCC Investments in Regional Integration Will Martin, Discussant
12:15-12:20 pm	Administrative Next Steps Shanta Devarajan, Chair
12:20-12:30 pm	Opportunity for Public Comment
12:30 pm	Meeting Adjourns

Welcoming Remarks, Overview of Meeting, and MCC Response to EAC Recommendations

Following the call to order, EAC Chair Shanta Devarajan opened with a brief introduction and handoff to MCC Chief Executive Officer Alice Albright, who offered opening remarks on the EAC's topic of discussion: investments in regional integration. CEO Albright in turn introduced Sierra Leone's visiting Minister of Finance Sheku Bangura who summarized the state of his country's power sector and the expected impacts of MCC's planned compact investments in transmission, distribution, and utility management. The Minister also observed the salience of the EAC's topic, given Sierra Leone's participation in the regional West African Power Pool.

Deputy Vice President for Evaluation and Acting Chief Economist Arif Mamun offered additional context to the topic, highlighting some of the institutional and statutory constraints that shape the scope of regional engagement. Separately, Mamun announced the imminent renewal of the EAC's charter under the Federal Advisory Committee Act and offered an update to the EAC regarding MCC's urban and climate-related investments

Zooming Out: MCC Investments in Regional Integration

A Topic Note, circulated in advance, served as background for discussion. EAC Member and Discussant Will Martin offered reflections on the topic, highlighting the importance of a regional perspective and noted that even domestic investments, e.g., in roads infrastructure, often contribute to the benefit of neighboring countries as well. Impacts can be lifesaving, even, as evidenced by the reduction of famine incidence in India, following investments in region-scale roads that facilitated the movement of food.

EAC Discussion

• Identifying the benefits of investments in regional integration: Members of the EAC suggested that investments in regional integration can yield benefits, in terms of trade, economies of scale, specialization, and differentiation. For trade in goods, the straightforward strategy is to reduce the costs of goods transport among regional partners through road infrastructure investments. Road investments can benefit a region by lowering cost of goods transport to final ports for export. Separately, integration can also facilitate trade in services, such as information and communications technology (ICT) and tourism.

  Meanwhile, harmonizing institutions and policy coordination within a region, a different kind of integration, are essential for national economies to establish platforms for collective action, e.g., trade protocols, regional power pools, and fiber optic lines for digital connectivity. Harmonization can also position countries to enter carbon markets as credible region-scale actors.

  That said, experience from multilateral development banks suggests that regional trade and policy reforms were often less successful than regional infrastructure investments. At the same time, regional infrastructure projects, such as roads projects, are not easy to implement, and benefits from such investments may not always reach the intended beneficiaries. Members suggested that greater returns could be achieved in regional projects that achieve scale efficiencies, e.g., shared power infrastructure.

• Comparing regional investments to their alternatives: Such benefits notwithstanding, members immediately raised the question of whether regional compacts may distract from more "global" scale integrations. Global integration, particularly with respect to trading with high-income partners, arguably generates greater returns to lower-income countries than regional trade among lower-income neighbors. One member observed that since Africa's GDP is only three percent of the global GDP, it may not be reasonable to expect large scale benefit from regional integration. Members mentioned that some research has pointed to the benefits free trade agreements (FTA) have generated within Africa and Latin America, but nonetheless MCC should carefully consider alternative compact scopes that may prove more impactful.

  By the same token, regional integration should be weighed against investments with more domestic applicability, i.e., MCC's traditional country compacts. If funds can be directed toward a higher return project with strictly domestic benefits, MCC should reconsider whether an investment focused on regional integration is the best use of its scarce grant funding. In the same vein, offering a partner country regional compact may effectively push a country's low-priority projects to the top of the list.

• Defining regions: EAC members asked, "what comprises a region"? Contiguous neighbors? Closest trading partners? One EAC member suggested that a trading block, such as the African Continental Free Trade Area (AfCFTA), could operate as a credible region for any member country. Another pointed out that the entire African Union could be considered a region.
• Identifying beneficiaries and calculating returns: Since regional compacts remain subject to MCC's cost-benefit analysis, members of the EAC asked how MCC captures benefits and beneficiaries that accrue to countries that are either not eligible for MCC projects or otherwise outside the partner country's designated region. Should Cape Verde's integration with Europe imply an assessment of benefits in Europe? Should MCC count benefits that accrue to a country that doesn't pass MCC's scorecard? Appropriately weighing the share of benefits accruing to the targeted partner country versus other countries in the region and beyond would be important for MCC's regional investments.

  Separately, in a regional context, MCC may consider calculating not only a no-project counterfactual, but also the counterfactual of undertaking a non-regional project equivalent. In other words, in a setting where two countries are weighing a jointly designed regional investment, the counterfactual may consist of simply two independent single-country investments.

• Identifying principles for regional integration: Members pointed to key elements that MCC should consider when weighing regional investments.
  • Diversification. Investments that diversify a domestic economy's access to markets and/or resources can reduce its exposure to risks and ensure more stable growth. For example, East Africa would benefit from diversified sources of energy, i.e., hydro, thermal, solar, or wind to expand its energy supply efficiently and resiliently at the regional level, not only spatially/geographically but also over time (whether daily or seasonal), helping the region achieve greater grid stability and productive capacity.
  • Scale. Regional integration makes large scale investments more feasible and spreads fixed costs across more actors. In one example of institutional investment, Indonesia established a center for training hydropower engineers for countries around southeast Asia.
  • Innovations. Often, countries locked into bad contracts or bilateral investment treaties struggle to adopt new technologies or more competitive arrangements. Buying out these contracts, arguably a unique application of grant funds, can unlock markets and create space for regional investments. Carbon markets may also acquire greater feasibility in a regional setting, as opposed to a single country.
  • Partnerships. Regional investments can exploit existing partnerships among development banks and private sector, e.g., Power Africa, to achieve efficiencies and ensure sustainable access to natural resources.
• Labor mobility: A key aspect of regional integration is the ability of workers to move across border, whether as migrants or simply to pursue business relations. One benefit of regional integration is the advantage it confers to small businesses that are unable to access global markets. That said, members asked whether any lower-income countries have capitalized on regional labor market mobility to achieve growth. Even the European Union waited to relax labor movement restrictions until late in its development.
• Risks of regional engagements: Coordinating regional compacts among multiple bilateral partner countries can present significant complexity and implementation risks, and countries often move at their own pace, optimizing their choices individually, not jointly. This raises the larger challenge of managing the political economy of coordinating across differently motivated actors. For example, a shared infrastructure's benefits can be uneven, and weaker countries might not want to depend on assets shared with stronger neighbors.

Members Present (virtually and in-person)

1. Tauhid Rahman
2. Syed Akhtar Mahmoud
3. Stefan Dercon
4. Homi Kharas
5. Asli Demirgic-Kunt
6. Shanta Devarajan
7. Will Martin
8. Celestin Monga
9. Alan Gelb
10. Will Masters
11. Paul Smoke
12. Mushtaq Khan
13. Louise Fox

Members Not Present

1. Maitreesh Ghatak
2. Ehtisham Ahmad
3. Ravi Kanbur
4. Michael Woolcock
5. Raquel Fernandez
6. Caren Grown
7. Shahrokh Fardoust
8. Lant Pritchett
9. Emmanuelle Auriole

MCC Staff Participating

• Alice Albright, Chief Executive Office, MCC
• Arif Mamun, Acting Chief Economist, DPE
• Mesbah Motamed, Designated Federal Officer

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