Foreign aid programs of the past decades have attempted to reduce poverty while introducing necessary reforms in recipient countries through “conditionality”--the practice of requiring economic or political policy changes in exchange for aid. It is now generally agreed that these programs have failed. Recipient governments have pretended to reform, and donors have pretended to penalize them, while poverty has gotten worse. Two key lessons have emerged: aid cannot reduce poverty in the face of bad governance, and policy reforms only take hold when they are locally owned.

Recent efforts build on these insights by using indicators to make policy shortcomings more visible and aid allocation more competitive. Created in 2003, the Millennium Challenge Corporation--the first major innovation in the U.S. aid system since the Kennedy administration--allocates aid according to a series of indicators that measure governance, social service provision, and economic freedom. Only countries that score well are eligible; those that score poorly have a powerful incentive to improve. The indicators devised to measure progress towards the United Nations Millennium Development Goals drive the development agenda. Even when not tied to aid, measurements like the World Bank’s Doing Business series or the Wall Street Journal/Heritage Foundation Index of Economic Freedom can have dramatic effects on policymaking in poor countries. Publicizing policy failures and ranking performance seems to make it easier for reformers in developing countries to attempt politically difficult reforms.

Is indicator-based competition the model for an effective allocation of twenty-first century aid? What is the evidence that it promotes policy reforms? If only what is measured gets attention, then what indicators are still missing? Discussing these and other questions will be some of the leading practitioners of indicator-based development policy. Panelists include--from the World Bank--Simeon Djankov, chief economist of the Indicators Group and creator of the Doing Business indicator series, and Aart Kraay, a lead economist on the governance indicators in the Development Research Group; Guido Schmidt-Traub, team leader of the Millennium Development Goal Support Unit in the United Nations Development Program's Bureau for Development Policy; and Sherri Kraham, managing director for Development Policy at the Millennium Challenge Corporation. Ambassador John J. Danilovich, CEO of the Millennium Challenge Corporation, will give the keynote address and AEI visiting scholar Paul Wolfowitz will provide introductory remarks. AEI resident fellow Mauro De Lorenzo will moderate.