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FOREIGN AID: Millennium Challenge Account

Author: Esther Pan
May 28, 2004
This publication is now archived.

What is the Millennium Challenge Account (MCA)?

A U.S. government program that gives development aid in the form of grants to poor countries that adopt economic and political reforms. On May 6, the Bush administration named the first 16 countries eligible to apply for MCA funds.

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What kinds of reforms are required?

MCA funds will go to countries that enact market-oriented measures designed to open economies to competition, fight corruption, and encourage transparent business dealings. In addition, governments must invest in their citizens' health care and education.

How much money will the program provide?

When President Bush announced the formation of the MCA on March 14, 2002, he said the United States would significantly increase foreign aid payments over the next three years, committing $1 billion to the MCA in 2004, $2.5 billion in 2005, and $5 billion in 2006. These funds are in addition to the foreign aid already given by the United States, which totals $12.6 billion in fiscal year 2004, according to the U.S. Agency for International Development (USAID).

What are its goals?

The MCA aims to encourage democratic governments and free-market economies. Often in the past, foreign aid was siphoned off by corrupt officials whose governments ignored the rule of law. "The idea was to come up with a new way of delivering foreign aid," saysCarol Graham, vice president and director of the governance studies program at the Brookings Institution. "[The United States] realized that giving aid to countries with bad policies didn't work."

How will progress toward reform be measured?

By evaluating each country on 16 indicators in three categories. Each country's score in each category must be above the median of all countries evaluated. This applies in all categories except inflation, which cannot exceed an annual rate of 20 percent.

Good governance. This category encourages policies that experts say promote economic development: protecting civil liberties and human rights, having anopen, accountable, and non-corrupt political system, andupholding the rule of law.

Public health and well-being. Thiscategory rates public welfare by measuring how much anation spends on health care and education, how many childrenfinish primary school, and how many citizens are immunizedagainst disease.

Economic openness. This category takesinto account a country's credit rating, annual rateof inflation, three-year budget deficit, trade barriers,and the number of days needed to start a business, whichis a measure of government corruption and red tape.

How will those indicators be evaluated?

The Millennium Challenge Corporation, the new independent agency that administers the MCA, will judge them using internationally accepted standards, according to the White House. Figures from the World Bank, for example, will be used to measure public expenditures on health care and education as a percentage of gross domestic product. The World Bank Institute, a research unit within the World Bank, will provide statistics measuring a country's levels of accountability and corruption. Freedom House, a nonpartisan advocacy group, will provide measures of civil liberties and political rights including, among other things, press freedom and the treatment of political detainees. The MCC will use International Monetary Fund (IMF) figures to evaluate inflation and budget deficits.

If a country doesn't qualify for MCA funds, can it still receive U.S. aid?

Yes. USAID, the main channel of U.S. foreign aid, gave $8.5 billion to poor countries around the world for health care, economic development, and democracy-building programs in 2003. The administration stresses that the MCA will complement, not replace, these existing aid efforts. "This is not compassion aid, food aid, or disaster assistance," says Kathleen Harrington, vice president for domestic affairs at MCC. "This is a policy reform directed at economic growth."

Do other donors impose conditions on aid they provide?

Yes. The IMF, which lends money to countries in financial crisis, makes borrowing countries sign a list of obligations--pledging to control budget deficits and curb inflation, for example--before lending funds. The World Bank's so-called soft loan program, which lends to poor nations at greatly discounted interest rates, requires applicant countries to complete a Poverty Reduction Strategy Paper (PRSP) that lays out their plans for spending World Bank funds. The World Bank, IMF, and most donor countries now accept the PRSP as an application for aid money.

Who runs the Millennium Challenge Corporation?

The MCC is supervised by a board of directors made up of four Cabinet-level officials— the secretary of state, who is chairman of the board, the secretary of the Treasury, the U.S. trade representative, and the head of USAID--and four members of the private sector selected by the president. The CEO of the corporation, Paul V. Applegarth, was nominated by the president and confirmed by the Senate.

Which countries are eligible for MCA assistance?
How will it work?

After the MCC chooses which countries will receive MCA funds, MCC negotiation teams will travel to each country to meet with members of the government and civil society. Together, they will work out a plan, or "compact," that details how each country will spend MCA funds to increase its growth rate and reduce poverty, as well as benchmarks to measure its progress. Each compact will be reviewed by the MCC's board of directors; once it is approved, Harrington says, the countries get their aid money.

Which countries will benefit?

The 16 nations announced May 6 are: Armenia, Benin, Bolivia, Cape Verde, Georgia, Ghana, Honduras, Lesotho, Madagascar, Mali, Mongolia, Mozambique, Nicaragua, Senegal, Sri Lanka, and Vanuatu.

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