Bush Policy on Aid
A Focus on the Millennium Challenge Account

By Candra R. Grant*

I. Introduction
During the march 2002 International Conference on Financing for Development in Monterrey, Mexico, world leaders discussed ways to alleviate the increasing income and quality of life gaps between rich and poor countries. At the conclusion of the conference, nations, developed and developing, committed themselves to the following goals: the halving of extreme poverty and hunger, significant improvement of health and education, the promotion of gender equality, combating HIV/AIDS and other infectious diseases, develop a global partnership for development, and environmental sustainability in developing countries by 2015. These targets, known as the Millennium Development Goals (MDGs), were previously endorsed by countries at the September 2000 UN Millennium General Assembly (Aossey and McClymont, 2003).

At the conference, President Bush pledged to increase US development assistance by 50 percent over the next three years to nations through the creation of the Millennium Challenge Account (MCA). Initial funding for MCA is proposed to be US$1.3 billion for the year 2004, but this has yet to be confirmed by the US Congress. However, it is projected that there will be a US$5 billion dollar annual increase in US development assistance by the year 2006 (USAID).

The MCA, along with a series of other Bush initiatives is an indication of a fundamental change in attitude toward development and humanitarian aid relating to foreign policy strategies since September 11. Analysts believe that the rationale for the incorporation of foreign aid into foreign policy strategies rests on a few key motives. According to Steven Radelet of the Center for Global Development:

First, aid can play a direct role in the war on terror by supporting both frontline countries and weak states where terrorism is prevalent. Second, foreign aid allows the US to project soft power to
accompany and offset its use of military power. Third, foreign aid can help bridge the gap caused by global poverty and inequality, which threatens US security and national interests (Radelet, 2003).

If all of Bush’s initiatives are endorsed and implemented by Congress, US aid will increase from almost $11 billion in 2002 to $18 billion in 2006, which is the largest increase since the Marshall Plan.

Being on the frontlines of this aid increase, the MCA is seen as a revolutionary change to the current state of foreign aid disbursal. Its objective criteria of good governance, investment in the people, and sound economic policies have led experts to argue: “It [the MCA] will bring about the most fundamental change to US foreign assistance policy since President John Kennedy introduced the Peace Corps and the US Agency for International Development in the early 1960s.” President Bush envisioned the MCA as a way to not only promote sustainable development, but also accountability.
Currently, US foreign assistance programs lack focus, with multiple objectives and purposes, which undermines the effectiveness of such programs. For instance, the US Foreign Assistance Act of 1961 specifies 33 different goals and 75 different priority areas (i.e., promoting security, development, humanitarian relief, political and economic transitions, and addressing transnational problems) (Radelet, 2003b). Although these objectives and priority areas are fundamental to US foreign policy objectives, the system becomes burdened down with bureaucratic conflict, and can actually harm the welfare of US policies and those countries. For example, US foreign aid given to help Cold War objectives actually facilitated corruption in the Democratic Republic of Congo (formerly Zaire) under Mobutu Seko and Nigeria led by a series of military rulers.
Unlike current programs, the MCA will have narrow and more clearly defined objectives, aimed solely at supporting economic growth and development, and not other foreign policy goals. Secondly, poor governance won’t compromise the effectiveness of the aid. Research indicates that aid tends to have little or no effect on growth in countries with weak policies and high corruption. Finally, the administration has attempted to lower bureaucratic and administrative costs by proposing the establishing of the Millennium Challenge Corporation. However, that proposal is being met with opposition in Congress, the State Department, and other governmental organizations over the specifics of the suggestion.

I contend that the Millennium Challenge Account, in theory, is a noble and revolutionary initiative that could promote sustainable development through competition, accountability, and change. However, the actual implementation will fail to give a significant boost in the international efforts to achieve the Millennium Development Goals by 2015 due to the inherent flaws in the criteria, the lack of flexibility in application, the bureaucracy of government, a step back in donor coordination, and the undercutting of US aid in other areas (i.e., AIDS, education, etc.).

II. Good Governance
Corruption, a poor human rights record, and systemic violations of the law create an environment that is not conducive to successful economic development. Therefore, the Millennium Challenge Account funds will only be given to those countries that demonstrate a commitment to good governance or ruling justly. The Administration’s indicators of good governance include human rights, political freedom, and below average corruption levels. Good governance enhances transparency within a country, which has a positive impact on foreign investors. Furthermore, the ruling justly aspect of the criteria ensures that funds are not increasing the financial and authoritarian legitimacy of corrupt and ruthless dictators (e.g, Mobutu or Mozambique’s Mugabe).

Although the mandate of good governance as a condition to receive aid is understandable, it is ahistorical, borderline ethnocentric, and the measurement indicators are subjective. First, this mandate ignores the means in which rich countries developed through the years. For example, the United States during its ascension to wealth and power committed a number of human and political rights violations (slavery, child labor, and discrimination against minorities and women). Studies have shown that today’s wealthy countries became developed with weaker institutions than most developing countries have today (Caliari, 2003). Therefore, the creation of a blueprint for development undermines the fact that wealthy nations developed in a variety of ways.

Second, the interpretation of good governance is based on an Anglo-American model of governance, which undermines the cultural, socio-economic, and social context of the recipient country. Finally, the World Bank admitted that the measurement indicators of good governance are subjective. Experts have criticized that the indicators are unreliable, and the World Bank team that developed the system have repeatedly called for caution in its application.

III. Investment in People
According to the policy-makers of the Millennium Challenge Account, a government’s keen investment in the social service sector, particularly in the areas of education, healthcare, and gender of its nation, is key to sustainable economic development. The rationale behind investing in the social services sectors of the economy is three-tiered. First, the empowerment of women and the elimination of gender inequality will have significant impacts on the economy. Women play a significant role in the economies of developing nations, which are usually agriculturally based, by producing up to 80 % of the food. Research also indicates that education and economic empowerment enable women to significantly improve the quality of their own lives and the lives of their children (Oxfam, 2003).

Second, universal education is valued not only because it is one of the primary Millennium Development Goals, but also because of its positive relationship with productivity and living standards. Finally, the investment in healthcare is important to the sustainability of economic growth. For example, malaria costs Africa US$12 billion dollars in loss productivity annually (All Africa, 2003) and HIV/AIDS is debilitating to a country’s labor force.

However, this criterion often conflicts with “sound economic policies” implemented by the country, World Bank, International Monetary Fund, or even the third area of the MCA. Given “sound economic policies” has been interpreted by the framers of the MCA to mean fiscal austerity, trade liberalization, and privatization, these types of structural and budgetary adjustments contradict the investment in the people criterion because fiscal austerity calls for budgetary contraction, which decreases the available resources for education, healthcare, etc. According to analyst, Aldo Caliari:

Indicators do not differentiate between internal and external factors responsible for failure. Governments implementing externally- imposed structural adjustment policies requiring the privatization of health and education, which had such negative impacts on the access to these services among the people in poverty, might paradoxically end up punished for the failure of these imposed policies to achieve adequate educational and health levels.

The inconsistency is somewhat reminiscent of old foreign development assistance, with its overly broad agenda, which can undermine its goals or make the situation worse in impoverished nations as they compete for this much-needed assistance.

IV. Sound Economic Policies
In addition to good governance and social investment, sound economic policies are crucial to long-term economic development. Therefore, the Millennium Challenge Account rewards those countries that are committed to economic policies that “foster enterprise and entrepreneurship” by liberalizing trade, encouraging the privatization of national-owned enterprises, and fiscal austerity. The US has a clear interest in this for a number of reasons. First, open markets allow US corporations access to large markets with high demand. Second, encouraging fiscal austerity reduces the possibility of massive deficits that developing countries have difficulty overcoming without burdening international institutions or governments.

However, the United States open trade policy may undermine the MCA efforts to facilitate development through economic policy. The high subsidies that the US and EU governments provide to their farming industry make it virtually impossible for developing countries to sustain themselves and access the international agricultural markets. Furthermore, the United States is again advocating an ahistorical point. The wealth and sustainability of the United States was not acquired through unfettered trade and open markets. The US was guided by a Hamiltonian principle of protecting infant industries against the Darwin-like international markets. Like the U.S., developing countries need to be afforded flexibility and time for the complete opening of their markets.

The economic criteria of the MCA seem more like the IMF’s “one-size-fits-all” policy, a strategy that has been disastrous, ineffective, and highly criticized. The Administration needs to take an in-depth look at all of the devastating social, financial, and environmental impacts that can be attributed to liberalization without adequate preparation. For example, when South Africa privatized its water companies, the price of water had increased so much that those in poverty lost access, thus leading to the suffering of thousands of people. Analysts argue that in order to have a positive impact on the economy, open trade reforms must be well-sequenced and paced, done on a selective basis, and in the context of a national development strategy (Caliari, 2003).

Finally, the inflation rate of a country is taken into consideration when determining qualification for funding. Under the current plan, only countries with an inflation rate below 20 % are eligible for the MCA. Yet, economists have not agreed on what constitutes an unhealthy level of inflation. This lack of certainty on appropriate levels again puts the country selection process at risk for subjectivity.

V. Problems with Implementation
Aside from the flaws that are inherent within the MCA criteria, the actual implementation of the initiative may fail to achieve projected results, and possibly lead to setbacks in the fight against international poverty. Many of the specifics of the plan have yet to be addressed, particularly what to do about failing or failed states, or states emerging from war. However, the current problems associated with implementation, such as: the poorest countries will fail to qualify, bureaucracy could get the best of the Millennium Challenge Account, and the MCA could reverse donor coordination progress.

First, the lack of flexibility in the MCA criteria will leave most of the MDG targeted countries no-entry during the first year with many years away from becoming eligible. In Africa, home to most of the world’s most impoverished countries, only four countries—Gambia, Ghana, Malawi and Senegal—will qualify during the first year of the program, and five will miss it because of one criterion (Hart and Sperling, 2003). Unfortunately, these nine nations are only 15 percent of the population in low-income African countries.

The stringency of the MCA criteria fails to reward or provide incentive to those low-income countries that are making significant strides in some of the key areas covered by the criteria. For example, Uganda will fail to qualify despite their commendable political commitment and broad-based efforts to prevent and treat HIV/AIDS (Hart and Sperling, 2003). Also, Kenya’s Kebaki has significantly reformed the nation’s judicial and governmental institution in an attempt to eliminate corruption. Finally, Ethiopia has increased the number of girls enrolled in school from 12 percent to 47 percent during the 1990s, even during a major famine. But in the pass or fail world of the MCA, these efforts are not worthy of reward or assistance. This could alienate poor countries that are facing the greatest development challenges.

Moreover, the focus on impoverished nations will be abridged when the MCA broadens to incorporate low-to-middle income countries like China, Russia, South Africa, Egypt, Jordan, and Turkey (Radelet, 2003c). This shift in focus has two major implications. First, the funds will be given to those countries that have a better chance at attracting other foreign investment, capital, and other resources. Second, given the number of low-to-middle income countries that the United States has strategic interests in, the possibility of politicization of the decision-making is high.

Another problem with implementation is the impact of bureaucracy on the available resources and distribution of funds. Although initially projected at $1.7 billion for the first year of the MCA, the House Foreign Operations Appropriations Subcommittee allocated only $800 million for the initiative in July (Radelet, 2003c). With the possibility of funding being cut further, the impact and certainty of the MCA grants will be greatly reduced.

Furthermore, the Administration has yet to establish an independent agency to make selections and distribute the funds. Currently, the State Department and other US agencies (i.e. USAID) will collaborate in the decision-making. However, this can lead to conflicts, and subsequent delays in the distribution of the funds. Frequently, the objectives of one department may conflict with another.

To help reduce the bureaucracy and administrative costs of the initiative, the House of Representatives has proposed the creation of the Millennium Challenge Corporation (MCC), an independent governmental corporation with total control over the MCA (Pasicolan, 2003). As proposed, the MCC will have a board of directors, chaired by the Secretary of State, and managed by a President-appointed chief executive officer. It will be staffed by a variety of individuals from different governmental agencies. However, significant influence over the governing board of the MCC is still possible under the Senate proposal giving the State Department three of five votes, which can sacrifice the MCC’s objectivity for other foreign policy goals.

Unfortunately, the risks of this proposal are being swept under the Congressional table. First, analyst Steve Radelet of the Center for Global Development argues that, “Dividing the US foreign assistance program into two agencies, USAID and the MCC, could impede on coordination and increase redundancy.” The Administration and Congress have failed to work out the details on whether the two agencies will be able to operate within in the same countries, and if so, under what conditions. Beyond coordination and redundancy risks, the MCC will take staff and resources from USAID, which will weaken the organization. Second, staffing presents another problem with the implementation of the MCC/MCA. According to the proposal, staffing is projected to be between 100 and 200 people, a figure well under the needs of a program that has a budget of US$5 billion, which can impede on the “high-quality operations that will be expected” (Radelet, 2003b).

More pressing than the bureaucratic challenges facing the initiative, the possibility of reversing upward trends of international donor coordination is of utmost concern to poor countries, NGOs, and other international organizations. Hart and Sperling contend:

Backsliding in this area could condemn poor countries to the unfortunate position of having to court myriad donors and wade through competing and conflicting regulations. And by going at it alone, the United States would forgo a powerful opportunity to increase the impact of its funding by bringing other donated resources to bear as part of multilateral initiatives (Hart and Sperling, 2003).

Therefore, this regression not only affect poor countries, but also the United States international leadership position regarding development. The adoption of a bilateral initiative by the United States could lead other countries to follow suit, which would significantly weaken the ability of the Bank and Fund to achieve the Millennium Development Goals by 2015, if it does not exacerbate the current problems facing the developing world.

One of the most significant problems regarding the MCA is its impact on other US foreign commitments. Although the Administration maintains the “MCA will complement not replace the existing efforts (i.e., AIDS, Education, Investment, etc.),” the tendencies of Congressional appropriations committees create significant doubt on the Administration’s claim. Analysts warn that it is likely that the MCA will undercut any new pledges to global efforts on AIDS and universal education. Current efforts to combat problems facing the developing world require more funding to make significant progress.

For example, many international organizations believe that the United States needs to increase its annual commitment to the Global Fund from $250 million to $2 billion (Hart and Sperling, 2003). However, it is highly unlikely that Congress will approve an additional $3 billion dollars in development assistance on top of the $5 billion that is committed to the MCA. Furthermore, recent promises by the Bush Administration to hold down non-homeland security spending reinforce this fear. Also, at the World Bank conference in Dubai, Secretary of the Treasury John Snow pledged to halve the budget deficit, which means that the government must reduce public spending (New York Times, 2003). Therefore, with all of these political and economic developments, current assistance initiatives are at risk of being rendered ineffective or weaken by the MCA.

VI. Recommendations to Broaden the MCA
1. The MCA should only be available to IDA-eligible countries
As previously discussed, the MCA will shift its focus from low-income countries (annual GDP per capita up to $1435, with an average of $460) to incorporate lower-middle income countries (annual GDP per capita up to $2975, with an average of $1965) by 2006 (Oxfam, 2003). However, I concur with many analysts that advocate that the MCA should only be available to low-income countries. IDA-eligible countries should be targeted because their needs are greater due to the concentration of poverty and poor social conditions, relative to lower-middle income countries. By requiring qualifying countries to be IDA-eligible, the MCA will play a powerful and positive role in achieving the Millennium Development Goals by 2015.

2. The MCA should be based on national poverty reduction strategies
Instead of this IMF-style “one-size-fits-all” strategy, the evaluation of a country’s performance should be based on its specific national poverty reduction strategy paper (PRSP), so as not to punish states for following a plan, which is adjusted for their resources, population, and regime style, that will be best for their economic and political progression. By following an already existing PRSP, the MCA funding would allow countries to get technical assistance for the weak areas of its strategy and accelerate unique development efforts. Furthermore, the avoidance of negative social implications (i.e., death, illiteracy, and poor healthcare) caused by ignoring the uniqueness of a country’s situation outweighs any of the possible benefits of strictly advocating liberalization, privatization, and fiscal austerity. Also, experts believe that the benefits of executing the PRSP process could produce such clear benefits as local ownership, donor coordination, and policy coherence.

A reliance on the PRSP of a nation will not undermine the integrity of the 16-point criteria, but will avoid the alienation of countries that would otherwise be years away from qualifying. This strategy would allow countries that are making significant progress, in accordance with their own plans, to be eligible for funding.

3. Make the MCA a Two-Tiered System
It has been widely proposed that the MCA include a second tier of funding to assist poor countries that demonstrate a commitment to the standards of the MCA criteria, yet fail to qualify. Sterling and Hart recommend that the US dedicate almost half of the MCA funds to the small set of countries that meet the Administration’s requirements known as “tier one” states. However, funding in the second tier would be reserved for poor countries with a major national strategy for economic development and poverty reduction. According to Sterling and Hart:

The second tier would clearly distinguish from traditional US assistance approaches by funding only broad policy initiatives or country-owned programs with clear potential to be scaled into nationwide programs.

This two-tiered system would be an incentive to continue development efforts in countries that would not have otherwise received funding, and possibly accelerate sustainable economic growth and poverty reduction efforts in the developing world. The second tier would not be some sort of pass for corrupt regimes to receive funding to increase their legitimacy; instead rigorous standards of accountability and transparency would be applied to monitor the implementation of the national strategy.

4. Continue Multilateral Donor Coordination
In order to avoid wasting the time and resources of developing, the United States must continue its multilateral donor coordination efforts. The MCA should not be an administrative burden on recipient countries by having an extensive application, implementation, and reporting process. For example, Honduras receives support for its education programs from almost 50 separate funding sources, each with its own application process, mission, and reporting requirements (Oxfam, 2003). I recommend that the US actively work with other donors to reduce the amount of unnecessary paper, duplications, and to coordinate donor standards. This move by the United States would free up the time of developing states to concentrate on more pressing issues like famine, HIV/AIDS, or access to water.

VII. Conclusion
The Bush Administration’s satisfaction with a “blanket strategy,” which completely ignores the uniqueness of a country’s natural resources, history, or even its geopolitical situation, the MCA will not only have a minuscule impact on the billions that are impoverished, but may actually exacerbate the problems they face. If the Administration thought that they were taking active steps to accelerate the Millennium Development Goals with the creation of the MCA, they were mistaken. Hopefully, other wealthy nations won’t follow the US example; otherwise, the international efforts to reduce poverty could be compromised.

Works Cited

1. Applegarth, Paul V. “A Commentary on the Millennium Challenge Account.” CSIS Africa Notes. Number 17. May 2003
2. Pasicolan, Paolo. “How to Prevent the Millennium Challenge Account from Becoming Like Traditional Foreign Aid.” The Heritage Foundation. July 15, 2003. http://www.heritage.org/Research/TradeandforeignAid/em892.cfm
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6. Unknown. “Millennium Challenge Account.” http://www.mca.gov
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9. Radelet, Steven (2). “Will the Millennium Challenge Account Be Different?” The Washington Quarterly. Spring 2003.
10. Lane, Marc J. “No Boondoggle to Tie Foreign Aid to Recipients’ core values.” Crain’s Chicago Business. Vol. 6, Number 35. September 1, 2003.
11. “Improving Development Effectiveness: Recommendations for the Millennium Challenge Account.” Catholic Relief Services. June 24, 2002.
12. Hart, Tom. Sperling, Gene. “A Better Way to Fight Global Poverty.” Foreign Affairs. Mar/Apr. 2003. Vol. 82, Issue 2.

* This paper was submitted in the course Global Governance and Development directed by Professor Paul N. Tennassee at the Washington Center (TWC) Fall 2003.