POLITICS & ECONOMICS: “Bush’s Aid Policy Prods Countries: Yemen and Lesotho Embrace Overhauls; The Gambia Balks,” by Michael M. Phillips, Wall Street Journal, 14 March 2007, p. A6. ARTICLE: “China Is Forming Agency To Invest Foreign Reserves: A $1 trillion hoard resulting from Beijing’s huge trade surpluses,” by Jim Yardley and David Barboza, New York Times, 10 March 2007, p. B3. POLITICS & ECONOMICS: “Advocates of Borderless Money Temper Outlook for Benefits,” by David Wessel, Wall Street Journal, 15 March 2007, p. A4.

The Millennium Challenge Corp is probably the most innovative thing the Bush administration has done, because it’s all about making clear to developing economies what the standards are for emergence.

In 2005, on his first day as head of President Bush’s signature foreign-aid program, John Danilovich’s to-do list included the unpleasant task of telling Yemen’s president that his reform efforts had slipped so badly that the country was being cut off. Last month, Mr. Danilovich phoned Yemeni President Ali Abdallah Saleh with better news: Yemen was back on the list of countries eligible for grants from the Millennium Challenge program. What happened during those 15 months is evidence of the potential ripple effects of the high-profile aid program--and the power of the threat to publicly shame countries that veer off the path of economic and political overhaul.

In short, it’s all about being credentialed by the biggest aid donor (size, not per GDP) in the world. My favorite example to date: Lesotho previously treated women the same as kids in terms of legal rights, unable to buy land or borrow money. We told them no good if you want MCC credentials:

With the Millennium Challenge Corp. pressing for changes, the Lesotho Parliament passed a law in November putting married women on equal legal footing with their husbands.

Only twice have countries been suspended: the nice Yemen story and the un-nice Ghana one (human rights abuses). So America basically has a hedge fund of very small amounts (only $3b granted to date), but one that focuses on getting countries to acceptable thresholds. Meanwhile, China puts together a fund that may command as much as half a trillion dollars and make financial investments (obviously different from grants, but in many instances not as much as you might assume) both at home and abroad. Naturally, China will be focused on making money as opposed to--as the leadership likes to put it--“interfering in the internal affairs” of other countries. It’ll be interesting to watch the demonstration effects of each. Why do I say this? The last article (from the always great “Politics & Economics” column in the WSJ) notes some recent research that suggests that the freer flow of investments in and of itself isn’t the big change agent in terms of volume (as in, more money equals more change), but rather that the sheer connectivity of accepting money from the outside and sending it abroad forces a lot of positive rule-set changes.

In short, exposure to global capital markets ups a country’s game, forces financial markets and firms to be more efficient, offers businesses and consumers better terms for borrowing and lending, reduces opening for corruption and discourages short-sighted domestic economic policies. It isn't the money; it’s the collateral benefits.

In other words, there’s the policy connectivity of encouraging new rules explicitly, and there’s the financial connectivity of encouraging new rules implicitly. Both can be very positive.