EVENTS

Date:	Monday, January 23, 2006
Time:	12:00 PM -- 2:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

January 2006

The Future of Foreign Aid? The Millennium Challenge Corporation Two Years On

In January 2004, the Bush administration established the Millennium Challenge Corporation (MCC), an innovative new mechanism for disbursing foreign aid. With billions in new funding and strong bipartisan support, the MCC promised to reward developing nations that practice good governance and respect economic freedom by providing them greater assistance. How effectively is the MCC working? What lessons have been learned from its first two years in operation? What challenges lie ahead? On the second anniversary of the MCC, panelists at this event considered its future during a January 23 AEI panel discussion.

Ambassador John J. Danilovich
Millennium Challenge Corporation

Two years ago today, Congress appropriated nearly $1 billion to establish the MCC. The president’s message regarding the vision of the MCC was clear--foreign aid should be about results, not simply donations. In demanding a return on investments made with U.S. taxpayer dollars, the MCC works with countries that are committed to taking the difficult steps toward social, economic, and political reforms. This assistance has the potential to improve standards of living far greater than any foreign aid policy in history.

Currently, the MCC is working with twenty-three eligible countries and eighteen threshold countries. In all, the MCC has signed five compacts and approved two threshold compacts for a combined total commitment of over $1.5 billion.

Despite these achievements, the MCC must continue to move forward with greater focus and alacrity, and it is already taking necessary steps to achieve this objective. For example, in the last two months the MCC has restructured many parts of the organization to streamline the proposal evaluation and compact development process. In addition, the MCC is investigating ways to shorten the time between compact approvals and disbursement of funds.

However, as the MCC moves forward it will always remain committed to their core principles. First, this includes the principle that funding is based on performance. Countries are selected for MCC assistance based on sixteen policy indicators in three areas: ruling justly, investing in people, and promoting economic freedom. However, countries granted eligibility that fail to maintain good policies will risk losing that status. Second, partner countries, not the MCC, have ownership of their compacts and must be held accountable for their activities. Third, the MCC encourages countries to implement programs that will remove impediments to growth. Finally, lifting nations out of poverty requires partnership between the country and the MCC.

The success of the program is defined not only in dollars spent but also on the long-term sustainability of the institutional reforms put in place by its foreign aid. Its success will be fully manifest only when its presence is no longer necessary.

Ambassador José Brito
Embassy of Cape Verde

The MCC is unique from other donor organizations in that it only provides development assistance to countries that have implemented good policies. Hence, they have set a precondition for countries before they even receive foreign aid. This is not enough. Donors must realize that development takes time and they must be patient for results to become fully apparent.

The MCC strives to make a difference in four areas. The first is in fostering country ownership. Because this risks the tendency of the country to present a wish list to the MCC, it is important for the country to establish priorities and a clear strategy to achieve its objectives. Subsequently, countries must conceive, develop, and implement their own programs with MCC monitoring. However, this will become problematic if the MCC tries to micromanage the programs in order to ensure that U.S. tax dollars are being spent efficiently. The second area the MCC aims to develop is in the participatory process, a key factor at both the onset of the program and in its implementation. Third, the MCC hopes to promote innovation in the aid business. This includes reinforcing capacity building within the recipient country. Finally, the MCC strives to create initiatives towards policy reform. The primary concern here should be to foster the political will that encourages support for these initiatives.

Society is often is too focused on poverty reduction as the ultimate goal. It would make more sense for donors to focus on creating wealth, because this will reduce poverty.

Clay Lowery
U.S. Treasury Department

The creation of the MCC in 2002 revolved around a series of questions in areas ranging from country selection and the amount of responsibility given to a country to the setup of the new foreign assistance agency. Four years later, a new series of questions have become apparent, which include the relationship between money spent and results, whether particular sectors should be emphasized, and the amount of risk allowable when making donations. In regard to risks, the MCC must have the ability to cut off aid if the desired results are not achieved, and Congress should allow this flexibility.

An example of when the MCC has denied a proposal was in 2004 when Armenia had asked for $900 million over three years for various projects. The MCC denied this proposal because it was obvious that Armenia did not have a clear objective or strategy. As a result, Armenia revised the proposal to focus on improving rural communities. The MCC realized that this new proposal represented a coherent vision, and in response they raised the amount of funds requested in the revised proposal. In short, the MCC needs to have the willpower to take risks, to cut off funding if necessary, and finally to make corrections in order to increase efficiency and to improve the institution as a whole.

Sean Mulvaney

The creation of the MCC was such an enormous challenge largely because it was trying to achieve massive reforms in three dimensions of the U.S. government: within the executive branch, between Congress and the president, and in the U.S. government’s interface with the developing countries.

Despite these challenges, there are three areas in which the MCC is achieving major reforms since its authorization. First, no other account provides incentives for developing countries to attain or at least strive for sound political and economic systems. Second, Congress has given the president much flexibility concerning the MCC. Likewise, Congress has put a great amount of trust in the MCC by agreeing to provide resources without designating these resources to a certain country or even sector. Third, the MCC is different from other traditional accounts because it does not encourage as much influence from various organizations, agencies, and even the U.S. government. This was done in order to ensure country ownership, capacity building, and accountability from countries in the implementation of foreign aid.

Nevertheless, the MCC has one key shortcoming: the lack of independent members on its board of directors. The architecture of the board requires there to be in place five members from the executive branch and four independent members. Currently, only two independent members sit on the board, while the remaining two await nomination. This is crucial to the structure of the board because the independent members provide stability and continuity to the system and ensure that decisions are not based on foreign policy agendas. Consequently, it is imperative for the necessary steps to be taken to nominate these individuals in order to round out the current membership.

Maureen Harrington
Millennium Challenge Corporation

The MCC is based on four core principles. First, good policies matter. Countries must meet certain criteria before they can even achieve a partnership with the MCC.

Second, the MCC requires that countries take on greater responsibility regarding their development efforts, encouraging greater country ownership. Countries were often surprised that funds were not allocated to particular sectors, but rather to areas specified by the countries themselves.

Third, the MCC is trying to produce results that have a greater impact on their partner countries. The implementation phase is just beginning, thus it is still too early to tell how well the MCC is performing in this regard. However, the MCC does not want to run the risk of becoming too involved and in effect becoming micromanagers.

Finally, the incentive principle of the MCC process has been successful. Countries are required to have good policies before they are rewarded with foreign aid. Consequently, the key challenge for the MCC is to adhere to all these principles as well as provide rewards within an acceptable timeframe.

Allan H. Meltzer
AEI

The most remarkable part about the idea of the MCC is the amount of time required to put three simple concepts together into a constructive development program. These three ideas are that countries reform when they want to reform, the MCC must focus on results, and the MCC must be willing to cut off countries that fail to achieve the desired results.

Secretary of State Condoleezza Rice, who is also the chairman of the board of directors at the MCC, stated that, “the aim [of the MCC] is to follow foreign policy objectives.” This statement implies that there is going to be some restriction on the independence of the MCC and that it would be part of the foreign policy apparatus of the United States. By placing the hand of the State Department in the MCC, it has the pressure to carry out the foreign policy objectives of the United States, running the risk of ending up like other traditional aid programs.

History shows that countries develop when the people of the country are ready and willing to develop. They must take the necessary steps to adopt institutions that enable them to prosper, as evidenced by China and India. Consequently, the MCC should aim to encourage citizens to adopt the necessary institutional reforms that will encourage development.

AEI intern Sapna Thakkar prepared this summary.