THE MILLENIUM CHALLENGE ACCOUNT

Americans are typically skeptical about foreign aid and its effectiveness.[1] American’s tend to overestimate the amount of money that the country spends on foreign aid, often preferring that those funds be spent at home. This coupled with the view that foreign aid rarely helps those intended: “The history of U.S. assistance is littered with tales of corrupt foreign officials using aid to line their own pockets, support military buildup, and pursue vanity projects.”[2] Has led to the low regard that the American public holds toward foreign aid. However, in spite of the public’s general skepticism, foreign aid continues to be an essential component of American foreign policy. Foreign Aid is a tool that the U.S. government uses to pursue its foreign policy, and generally fulfill six goals laid out by the Foreign Assistance Act of 1961. These goals are: Promoting security [a good example would be aid to Israel and Egypt, which accounts for $5 billion of America’s $20 billion aid budget];[3]Providing humanitarian assistance [consider the relief efforts after the 2004 Asian Tsunami]; Assisting nations in economic or political transition; Advancing democracy; Addressing transnational issues [Aids, Malaria], as well as (and the focus of this paper), providing assistance to spur economic growth in underdeveloped nations: “In principle, pure development assistance should be allocated to the investments with the highest potential social value, which generally reflects a combination of the extent of need and the local policy environment.”[4]

Reconciling the various overarching goals of U.S. foreign assistance has always been difficult, and prone to complications when aid programs aim to achieve more than one of the goals. In such cases, there has been confusion and a lack of clarity in U.S. policy, and ineffective aid policy: “U.S. bilateral assistance has been heavily criticized for not having a clear focus or strategy and for not showing sufficiently strong results in recipient countries. Critics see USAID [United States Agency for International Development] as highly bureaucratic, undermined by competing special interests and extensive earmarking”[5] Moreover, the USAID policy of designing, as well as, implementing aid programmers (with little input from recipient countries) has hampered the development of aid programs that comport with the overall economic strategic plans of the recipient nations.

In March 2002, President George W. Bush, announced[6] the creation of a new aid program, aimed at resolving the problems identified above. The Millennium Challenge Account (MCA)[7]: focuses exclusively on economic development; provides clear criteria for identifying recipient nations; focuses on needy nations with good social, political and economic policies; limits the bureaucratic hurdles that impede aid programs; and emphasizes financial and programmatic evaluation.

The Millennium Challenge Act, created a new corporation – the Millennium Challenge Corporation – that is charged with the administration of the programs expected $5 billion yearly development budget. The act provides that recipient nations are to be those with per capita incomes at or below $1,466, and eligible for concessional loans from the World Bank.[8] This yields a potential list of 72 nations; the list is parried down to 18, by applying 16 criteria (based on themes of “ruling justly”, “investing in people” and “economic freedom”): [9]

Ruling Justly
- Political Rights
- Civil Liberties
- Voice and Vote
- Government Effectiveness
- Rule of Law
- Control of Corruption

Investing In People
- Primary School Completion Rates
- Primary Education Expenditure
- Health Expenditures National Governments
- Immunization rates

Economic Freedom
- Country Credit Rating
- Inflation
- Fiscal Policy
- Trade Policy
- Regulatory Quality
- Days to start a business.

The development of these criteria is based on a widely held – in the development field – belief that aid effectiveness is tied to good sociopolitical and economic governance: “The publication in 1998 of a World Bank study of aid effectiveness, Assessing Aid: What Works, What Doesn’t Work, and Why, provided a strong conceptual and empirical underpinning for making performance-based aid part of the conventional wisdom in the field of development assistance. The empirical work for this study concluded that foreign aid was effective in raising the incomes and reducing poverty in good-performing countries, but had no effect on either in countries with bad policies.”[10] In addition, the Millennium Challenge Act also places the onus for the development of programs on the recipient country, increasing ownership of the policies, encouraging states to focus on areas of great concern, as well as, developing policies that comport with the overall strategic economic plan.[11]

There are two main problems with the MCA, one programmatic and the other environmental. Programmatically, the data used to classify states can be problematic, prone to inconsistency, bias and even fraud (especially government derived data): “First, the quality of the data varies enormously. Indicators for a country’s policies on health and education can be measured with numerical precision, as is the case for fiscal and monetary performance in general; but indicators for trade openness, the regulatory climate, and most of the governance data are surveys or composites of a variety of statistics, which are measured with a high degree of error.”[12] The measurement problem can lead to needy countries avoiding the MCA, believing that they cannot meet the stringent measurement criteria.

Environmentally, the MCA is subject to budgetary constraints familiar to all who operate in the federal government, and particularly in times of economic uncertainty. The failure of congress to fully fund the MCC at $5 billion is a clear indication of the sacrifices that may need to be made in the future, obviously limiting the overall effectiveness of the program.

On balance, however, the Millennium Challenge Account is a noble aid policy. By focusing exclusively on economic development; creating a separate corporation to implement the policy; providing clear criteria for the assessment for identifying good-performers; and allowing recipient nations develop there own aid programs, with a focus, on overall development strategies; the MCA creates an atmosphere of clear, accountable aid, with tremendous incentives for recipient states to maintain good behavior, and providing under-performers with achievable goals. If this policy continues to be effectively implemented, it could achieve President Bush’s ultimate goal: “countries that live by these three broad standards – ruling justly, investing in their people, and encouraging economic freedom – will receive more aid from America. And, more importantly, over time, they will really no longer need it, because nations with sound laws and policies will attract more foreign investment.”[13]

[1] Alan F. Kay, “Economic Aid, Military Aid, or Neither” http://www.cdi.org/polling/5-foreign-aid.cfm
[2] Brainard, Lael, “Compassionate Conservatism Confronts Global Poverty” The Washington Quarterly Spring 2003, 26:2 p 152
[3] Radelet, Steve, “Will the Millennium Challenge Account be Different?” The Washington Quarterly Spring 2003, 26:2 p 172
[4] Fn 2, p. 153
[5] Radelet, Steve, “Beyond the Indicators: Delivering Effective Assistance through the Millennium Challenge Account.” Center for Global Development, Sept 2002. p. 1. USAID is the primary U.S. agency charged with Development Aid Programs.
[6] Located at www.whitehouse.gov/news/releases/2002/03/20020314-7.html.
[7] The Millennium Challenge Act, signed by President Bush in February 2004, codified the policy into law.
[8] Fox, James and Rieffel, Lex, “The Millennium Challenge Account: Moving Toward Smarter Aid.” The Brookings Institution, July, 2005
[9] To qualify for funding, a country must achieve above the median average (of country’s in its group) in 9 of the 16 criteria. The data is collected from a variety of sources: the World Bank, Freedom House, The International Monetary Fund, The Heritage Foundation, UNESCO, and National Governments. Fn 7, 32
[10] Fn 7, 29
[11] See Fn 2, p 161 and Fn 3, p. 182
[12] Fn 2, p. 151
[13] As quoted in Fn 2, p. 156-157