How to Improve the Bush Administration's Millennium ChallengeAccount

February 28, 2003 12 min read
The
United States has spent hundreds of billions of taxpayer dollars on
development assistance to help poor countries attain growth and
prosperity. The record of this effort has been disappointing, with
few recipients achieving substantial improvements in per capita
income. The evidence provided by numerous studies indicates that
this failure is due not to insufficient funds, but to the poor
policies of recipient countries. Taking lessons from this experience, the
Bush Administration has unveiled the Millennium Challenge Account
(MCA), a new $5 billion development assistance program for
countries "ruling justly, investing in their people, and
encouraging economic freedom."1 The MCA would be different from
previous aid programs because recipients would earn eligibility by
surpassing minimum criteria based on simple, transparent, and
publicly available performance indicators. These indicators have
been selected based on evidence that they contribute or are
complementary to long-term growth and prosperity rather than on
subjective, political motivations unrelated to development. The
basic framework for the Millennium Challenge Account as presented
by the Administration is sound, but Congress can improve its
administration and prevent the recurrence of past failures in
development assistance. Specifically, Congress should: Ensure that
eligibility for the MCA is determined solely according to a
country's performance in the 16 indicators identified by the
Administration. Using the indicators to establish
eligibility will encourage prospective recipients to increase their
efforts to improve in the 16 indicators identified by the
Administration as contributing to growth and prosperity. The
effectiveness of the MCA will only be undermined if country
eligibility is subject to political influence. Maintain
constant pressure on MCA countries to improve. The MCA
should annually update the eligibility requirements to encourage
countries to continue improving. These moving benchmarks, however,
should be set up in a manner that allows countries to anticipate
eligibility thresholds. Make it
difficult, but not impossible, to change MCA indicators.
Making substantial improvement in the indicators may require
significant reform that will not bear immediate fruit. Therefore,
potential recipients must be reasonably certain that the criteria
will not change in midstream after they undertake such reform. Require annual
independent assessments of the MCA's success in meeting its
goals. The reports should evaluate the success rates of
MCA-funded projects and determine the contribution that the MCA has
made to increased growth and prosperity in recipient
countries. Create a sunset
provision that terminates authority for the MCA if it does not
prove more effective than past development efforts. The
strongest argument for the MCA is that it is an alternative
approach to existing development assistance, which has proven
largely ineffective at increasing economic growth and prosperity.
There is no need for two development assistance programs that are
equally ineffective. Therefore, authorization for the MCA should
sunset after a period sufficient to measure its effectiveness in
accomplishing its stated goals.
The
Bush Administration is asking for $1.3 billion in fiscal year (FY)
2004, rising to $5 billion in FY 2006, for countries with a proven
track record of adopting policies conducive and complementary to
long-term economic growth and prosperity. The Administration has
identified three policy areas--good governance, investment in
health and education, and promoting economic freedom--and 16
performance indicators that measure these areas. (See text box,
"MCA Criteria.") To
qualify for the MCA, a country must score above the median2 for half of the
indicators in each policy area--that is, it must pass three of the
six performance indicators that measure good governance, two of the
four that measure investment in people, and three of the six that
measure economic freedom. The Bush Administration also has
determined that countries must pass the "control of corruption"
indicator to qualify. Although the "control of corruption"
indicator is important, the "rule of law" indicator is a better
fail-safe because weak rule of law allows corruption to continue
unpunished. Addressing the rule of law, therefore, would help
address the issue of corruption. In addition, strong rule of law
has been shown to be a key component in long-term economic growth
and prosperity.3 In
terms of income requirements, only countries with a per capita
income less than $1,435 will be considered during the first two
years of the MCA.4 In
the third year, countries with a per capita income between $1,435
and $2,975 will also be considered. The median scores for each
income group will be computed separately. Focusing MCA resources on countries with
good policies is appropriate; based on World Bank analysis, which
has found that development assistance programs spur growth only in
countries with sound policies and institutions, it is clear that
aid is far less effective in bad policy environments and can
actually be counterproductive.5 Other World Bank studies have
demonstrated that open markets and economic liberalization provide
the fastest, most reliable path to growth and prosperity. A
2002 study, Globalization, Growth, and Poverty: Building an
Inclusive World Economy found that "globalized" developing
countries (nations where trade as a percentage of GDP is high)
achieved an annual average growth rate of 5 percent in per capita
income during the 1990s. In less globalized developing countries,
the "aggregate growth rate was actually negative in the 1990s."6 Contrary to claims
raised by anti-globalization activists, World Bank analysis also
found that globalization helps the poor as much as the rich and
improves labor and environmental standards in the long run.7 The
Index of Economic Freedom, published annually by The Heritage
Foundation and The Wall Street Journal, confirms these studies.8 As the Index shows,
free countries on average have a per capita income twice that of
mostly free countries, and mostly free countries have a per capita
income more than three times that of mostly unfree and repressed
countries. This relationship exists because countries that promote
economic freedom provide an environment that facilitates trade and
encourages entrepreneurial activity, which in turn generates
economic growth.
The
basic framework for the Millennium Challenge Account is sound, but
Congress can improve its administration and prevent the recurrence
of past failures in development assistance. Specifically, Congress
should: Ensure that
eligibility for the MCA is determined solely according to a
country's performance in the 16 indicators identified by the
Administration. Using the indicators to establish
eligibility encourages prospective recipients to increase their
efforts to improve in the 16 indicators identified by the
Administration as contributing to development. For this incentive
to be effective, countries must be able to determine what
improvements must be made to qualify for MCA assistance.
The effectiveness of the MCA will only be
undermined if the Millennium Challenge Corporation (MCC) or its
Board of Directors is permitted to approve MCA assistance to
countries that do not qualify for that assistance based on their
performance. As more political subjectivity is inserted into MCA
eligibility, there is less incentive for countries to improve.
Similarly, Congress should resist the temptation either to earmark
specific amounts for specific countries or regions or to attach
requirements in addition to the 16 indicators identified by the
Administration for MCA eligibility, as these will dilute the MCA's
objectivity and effectiveness. Therefore, the sole criterion for MCA
eligibility should be a country's performance in the established
indicators. Politically motivated assistance, to the extent it is
deemed necessary, should be made through other assistance
programs.

Use eligibility
to maintain constant pressure on MCA countries to improve. Instead, it should For instance, if 2003 data are used to However, if eligibility for 2004 is based on 2002 This gives potential recipients the

Make it However, new and better indicators may be To ensure use of the best indicators available

Require annual The Therefore, authorization for the MCA should The

The specific objectives of the MCA If the MCA is not To preserve the Brett D. Schaefer is Jay Kingham Fellow in