After decades of trying to make the world a better place, the United Nations’ latest ideas for fighting poverty involve carving stones and giving speeches. On Monday, the organization celebrated the 13th annual International Day for the Eradication of Poverty, inaugurated in 1992 to “promote … concrete activities with regard to the eradication of poverty and destitution.”

This year’s “concrete activity” is more literal than in previous years: a ceremony to lay a “Commemorative Stone to Honour the Victims of Extreme Poverty.” The stone’s inscription was read in the United Nations’ official languages, followed by the dedication of flowers in honor of the dead. Speaking of which, during the 90-minute event, 180 African children were killed by malaria, 850 people died from water-borne diseases, and 1,000 children under five starved to death. A reception followed the ceremony.

Fortunately, the United Nations isn’t the only game in town when it comes to international development assistance. The most promising innovation in foreign aid hails not from New York City but, oddly enough, from Washington, D.C. The Millennium Challenge Account, now in its third year, aims to reduce poverty by promoting economic growth in countries that have already demonstrated a willingness to help themselves.

The account recognizes that the only path to development is an indigenous one. No amount of foreign aid, however well intentioned, can ever eradicate poverty in developing countries unless those countries take the lead. Bucking the trend of traditional aid, the account is based on a fundamental premise long overlooked by the development community: Incentives matter. The Millennium Challenge Corporation, the government body charged with administering the account, uses third-party quantitative indicators to assess policies in low-income countries to determine how committed they are to economic freedom, ruling justly, and investing in people. Then they reward the top performers.

Those countries that outperform their peers are invited to submit proposals to the corporation for large-scale development projects. The corporation funds the best proposals with grants – not loans – and commits to monitoring the country’s progress to ensure that funds are used as they are intended. The process creates an incentive for countries that don’t qualify in one year to start pursuing policies that free up the economy and contribute to good governance so they will be rewarded the following year. The emphasis on incentives is the corporation’s key advance over previous foreign aid programs. The indicators the corporation uses to measure eligibility are updated annually to ensure they actually measure a commitment to good policy. The third and latest update will become final later this month.

Although the program is still young, it is already bearing fruit. Over the last two years, the time it takes to start a business in low-income countries has fallen by 25%. Much of this decrease has been attributed to the insistence that countries improve on this margin before they are eligible to receive funds. This means more entrepreneurs are starting legal businesses and creating wealth – “reducing poverty” in government-speak – in their communities.

But there is a caveat. The success of the account has resulted in myriad special interests trying to hijack it for their own policy goals. They’ve lobbied for the adoption of indicators that use their various pet causes as a basis for distributing funds. If they succeed, the corporation will be awarding funds not based on a country’s commitment to poverty reduction through economic growth but based on how closely it marches in lockstep with influential special interests.

To name but one example, command and control environmentalists are pushing to add a “natural resources management” indicator to the eligibility criteria. This indicator could be based on enforcement of the Convention on International Trade in Endangered Species, a 1970s treaty banning trade in wildlife products. Discouraging poaching might be a good idea, but asking the Millennium Challenge Corporation to play park ranger is irresponsible and threatens to mute the effectiveness of the other criteria to encourage growth-enhancing policies.

Instead, developing countries need to pursue fundamental institutional reforms, reforms that build the enforcement of property rights and increased rewards for productive entrepreneurship into their economies. If the American government is going to reward them for something, it should be for this. History teaches that economic development precedes environmental quality and other desirable social outcomes such as good health and quality education. Indoor plumbing does not guarantee wealth, nor do complex regulatory apparatuses or large infrastructure projects. Asking developing countries to emulate developed countries without first building an engine of growth into the economy is wishful thinking at its worst.

If the Millennium Challenge Corporation encourages countries to focus on anything other than fundamental institutional reforms – those that build the enforcement of property rights and productive entrepreneurship – free-market reforms, it will divert them from key reforms and doom them to further stagnation and decline. Sadly, these countries will fail to become richer and in turn lose benefits of wealth like environmental quality, better health, and quality education along the way. Focusing on the wrong indicators raises the incentives to implement the wrong policy changes just as focusing on the right ones offers promising opportunity for much needed reform.

The Millennium Challenge Account represents a remarkable opportunity to enable prosperity in the developing world, but it must remain true to its mission of reducing poverty through economic growth to succeed. While the United Nations discusses poverty over cocktails, the MCC is quietly revolutionizing international economic development. The real challenge is to keep it that way.

Mr. Hooks is director of the Global Prosperity Initiative at the Mercatus Center at George Mason University and also Director of Enterprise Africa!, a project to identify enterprise-based solutions to poverty. This article was written in conjunction with Daniel Rothschild, who is a program associate at the Mercatus Center.