The Millennium Challenge Account: Making U.S. foreign assistance more effective?

By Sheila Herrling and Steve Radelet

One of the greatest surprises of George W. Bush’s presidency has been his efforts to both dramatically increase amounts of U.S. foreign assistance and introduce innovations in how aid is delivered. In March 2002, Bush proposed the creation of the Millennium Challenge Account (MCA), a fund to provide grants to a select group of countries that are “ruling justly, investing in their people, and establishing economic freedom.” That September, the administration released a National Security Strategy that elevated development on par with defense and diplomacy as its three key foundational pillars. In May 2003, the President’s Emergency Plan for AIDS Relief (PEPFAR), a five-year, $15 billion fund to combat HIV/AIDS in Africa and the Caribbean, was established. In 2005, Bush launched a five-year, $1.2 billion Malaria Initiative and was at the forefront of the Multilateral Debt Relief Initiative (MDRI) that cancelled 100 percent of the debt claims on many of the poorest countries of the world.

Of all these initiatives, perhaps the most revolutionary is the MCA, which was approved by Congress and formally established in 2004. The design, promise, and progress of the MCA are best understood in the context of broader debates about U.S. foreign assistance programs. For decades, foreign assistance programs were (1) criticized as a hodge-podge of uncoordinated initiatives; (2) wasted on countries with governments that are not serious about development and that cannot use it well; (3) often politicized and aimed at achieving short-term political goals rather than long-term development; (4) too bureaucratic, earmarked and inflexible to be responsive to today’s needs and to reach intended recipients; and (5) set up with little accountability.

The MCA was designed to address some of those criticisms and reorient U.S. foreign assistance to embrace the lessons learned over the past 50 years on what makes for successful aid—many of which are captured in the Paris Declaration on Aid Effectiveness and, more recently, in the Accra Agenda.

The MCA concept

The MCA’s promise was rooted in six key guiding principles:

• Clearly focus assistance on promoting economic growth and poverty reduction, rather than supporting diplomatic and political partners or achieving other goals that can be supported with other programs
• Select a small number of recipient countries that have demonstrated a strong commitment to sound development policies, helping make aid funds more effective
• Allow recipient countries to set priorities and design programs through a broad consultative process, engendering stronger commitment for success by recipients
• Keep the bureaucracy to a minimum, avoiding the large administrative structure, heavy regulation, and overlapping congressional directives that bedevil other aid programs
• Provide recipients with sums of money large enough to make a real difference on the ground and provide strong incentives for success
• Hold recipients accountable for achieving results, including being willing to increase funding for successful programs, reduce it for weaker programs, and terminate it if necessary.

Progress to date

The MCA has made significant progress in several key areas. First, its country selection process has worked relatively well. The Millennium Challenge Corporation (MCC), by and large, has selected countries based on the merits of their commitment to strong policies, not on political or diplomatic criteria. Its methodology of selecting countries on the basis of publicly available data generated by independent sources has provided credibility and generated interest among other donors. Most importantly, it has created a strong “MCC Effect” in which the requirement to pass specified quantitative indicators has created the incentives for potential recipients to more carefully track the data and introduce key policy changes. There are examples from all around the world of the incentive effect of the MCA selection process.

Second, the MCC has moved to the frontier of facilitating broad participation among government, non-government, civil society, and private sector representatives in determining priorities and designing projects and programs. Many aid agencies talk about country ownership and a participatory approach, but the MCC actually has been making it happen. It is far ahead of any other U.S. foreign assistance agency in facilitating broad participation among the public in its programs.

Third, much of the focus of its early efforts has been in Africa, and in sectors that are critical to economic growth that have been underfunded by other donors. To date, 11 of the 18 signed compacts are in Africa, the total monetary value of which represents 73 percent of all MCC commitments. Of these amounts, 80 percent of funding will be aimed at agriculture, rural development, transportation, and other infrastructure. This funding fills huge unmet needs that are central to the process of economic growth and poverty reduction. Beyond the numbers, the process of compact design and implementation has helped build increased capacity in recipient countries for project oversight and management.

Nevertheless, while the MCA has shown promise, its initial progress has been slower than had been initially hoped. Many compacts have taken longer than anticipated to be developed, and implementation has often been behind original schedules. Out of the nearly $6 billion committed, just $311 million was actually disbursed as of October 2008. To some extent, the MCC has been a victim of unrealistic expectations, as many assumed that it would be able to implement projects and see results very quickly. But since the MCC started from scratch, at the beginning resources were dedicated primarily to staffing, organizational design, and developing key policies and approaches. Moreover, true participation and country-led approaches take time, especially where capacity is relatively weak. This combination inevitably (and justifiably) led to a relatively long period before actual program implementation could begin. Nevertheless, some of the delays were due to unnecessary bureaucratic requirements, hiring staff with the wrong kinds of background (especially in the early days), hiring inadequate numbers of staff (the MCC has just 300 employees), and establishing parameters that led to overly large and complex compacts.

While less progress has been achieved at this point than had been hoped for, these early steps provide an important foundation for continued progress in the coming years.

Key challenges going forward

Speeding progress and showing results: The MCC must better balance the need to speed the design and implementation processes with the need to allow for country-led approaches and ensure quality projects. While the MCC has taken important steps along these lines recently, it must continue to streamline processes and procedures. It must also find ways to better present intermediate results achieved along the way, in particular, how the policy reforms undertaken by countries to get into the MCA program ultimately make its programs more sustainable. And, to the extent practicable, it should consider alternative financing options, including budget support in countries with strong fiduciary systems.

Securing approval for longer and concurrent compacts: The current legislation governing the MCC allows only one compact per country at a time, and it caps compact length at five years. Both of these provisions should be revised. The first creates the incentive for partner countries to make compacts as big as possible (reaching as large as $700 million), so compacts are complex and the process for approvals cumbersome, slowing progress. Countries feel that they have one bite at the apple and want to put everything possible into their compact. Moreover, because of the complexity, countries face increased risks of not meeting compact goals within the five-year limit.

Targeting the poorest countries: With constrained budget resources, the MCC should stop funding middle-income countries and concentrate on the poorest countries. Allocating funds toward middle-income countries (that typically have higher saving rates and other options for financing, including private markets) and away from the poorest countries (that have far fewer options) is not the most optimal use of MCC funds. The biggest poverty reduction bang for the MCA buck is not going to come from countries that are three times richer than the original low income group.

More comprehensive modernization of U.S. foreign assistance

From a broader perspective, looking back, it is now clear that the administration could have, and should have, introduced the MCA as part of deeper reforms of U.S. foreign assistance programs. The key initiatives of the Bush administration—the MCC, PEPFAR, the Malaria Initiative—have all been important, but they have added to the fragmentation and lack of coordination across U.S. assistance programs, and they have done little to address some of the weaknesses of the U.S. Agency for International Development and its foundational legislation (the badly outdated Foreign Assistance Act of 1961).

To make U.S. foreign assistance programs truly effective, more substantial reforms are necessary to bring all foreign assistance programs under one independent authority (preferably a new Cabinet agency), re-write the Foreign Assistance Act, and develop clear strategies and coordination mechanisms at the White House for development policy and foreign assistance. That strategy would recognize, among other issues, the need for delivering aid programs in different ways across different developing countries, depending to a large extent on recipient countries’ capacity to deliver effective programs, including a greater reliance on country ownership and country-based systems. But even in the context of these broader reforms, the need would clearly emerge for a program like the MCA to deliver significant amounts of assistance to poor but well-governed countries that are committed to effective development programs.

Sheila Herrling, Senior Policy Analyst, and Steve Radelet, Senior Fellow, are at the U. S. think tank Center for Global Development, in Washington DC.

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