The Millennium Challenge Account: Unlearning How to Make Aid Work?

By Aldo Caliari

(August 6, 2003) In March 2002, a few days before the Financing for Development Summit (FFD), President Bush announced his initiative to create the Millennium Challenge Account (MCA). The proposal called for gradually increasing U.S. overseas development assistance over a period of three years, beginning in FY 2004. By FY 2006, the annual amount of U.S. foreign aid would have increased about 50% to around US$5 billion. One distinctive feature of the proposal was that the recipient countries would only be selected from among those countries deemed to have a policy environment adequate to ensure that aid would be effective. Although the criteria to select the recipients of the MCA funds was not given at the time, the Bush Administration announced that the recipients would be those countries that were committed to 1) sound economic policies (economic freedom), 2) ruling justly (good governance), and 3) investing in their people (health and education).

The announcement of the MCA was aimed at appeasing criticism of the obstructionist position that the U.S. had taken throughout the rest of the FFD conference process by showing some willingness to make a concession, even if only in unilateral terms. In fact, the announcement received a lot of attention from the media from all over the world gathered in Monterrey, Mexico for the FFD Summit. However, the very broad language used in the initial official speeches made it difficult, if not impossible, for anyone to make an objective assessment of the potential impacts of the MCA on poverty reduction and on development in developing countries. In the more than one year that has passed since the MCA was unveiled, civil society organizations have been engaging significantly in the discussion around the selection process and criteria for MCA recipients. Today, much more is known about these criteria because the Bush Administration has sent to Congress a concrete legislative proposal. The proposal, presenting the most detailed description of the MCA selection criteria available so far, offers reasons to be deeply concerned about its likely impact on the recipient countries

GENERAL CONCERNS

According to the proposal, the MCA recipients will be selected based on a measurement of performance according to 16 criteria grouped into three clusters, each of them covering one of the policy areas originally outlined by the President’s March 2002 announcement. To qualify, a country must score above the median on half of the criteria in each policy area. There are two exceptions: for a country to qualify, its inflation must be below a pre-specified rate and a country not scoring above the median in the anti-corruption criterion cannot qualify.

The approach to the selectivity on which the MCA so heavily relies is very troubling. Such selectivity implies that aid is more effective in producing results when directed to countries that have in place “good policies” which is, of course, true.

The question, however, gets tricky as soon as one begins trying to determine what those “good” policies are and who has the right and the knowledge to decide what is “good.” For example, there is widespread agreement today that there is no such thing as a universal model of development. Different countries have developed using different policies. Hence, there is need to allow countries the policy space to discern their own mix of policies, tailored to their respective endowments and their social and political circumstances. But the MCA assumes that there is a one-size-fits-all set of policies that is “good” for all countries everywhere and acts as a  precondition for growth.

It is also widely accepted that policies can only be successful when they are owned by the government and the society in a country. However, it is clear that under the MCA proposal, a country whose government and society have achieved a democratic consensus on a set of policies that they find suitable might not be eligible for aid unless the policies they “own” reflect the U.S. government’s model policies.

An additional problem is that the proposed MCA selectivity does not address the contradictions among the different indicators. For example, many of the economic policies a country  needs to implement to qualify under “economic freedom” can only be implemented in a climate of repression and by curtailment of the civil liberties and political freedoms that are essential to approval under the criteria for “good governance,” as the experience of several developing countries has shown. As another example, “primary education completion rates,” assessed under “investing in people,” have declined in many countries due to implementation of budget cuts needed to meet the kind of budget deficit targets that are assessed under “economic freedom.” A critical assessment of more specific MCA indicators that would be used to rate countries on each policy area is important from a social justice perspective.

SOUND ECONOMIC POLICIES

Some of the indicators under this cluster closely resemble the neoliberal policies that have spread through the developing world via the lending programs of the World Bank and the IMF for the last twenty years. Not only have such policies promoted little in terms of economic growth, but they have also led to disastrous social and environmental impacts. Some specific indicators under this cluster are:

Trade policy. The proposed indicator is an index of economic freedom developed by the Heritage Foundation. Using this indicator amounts to adhering to the view that trade liberalizationis always conducive to growth. Yet, this notion has become severely contested even by mainstream economists who have brought to light the serious flaws of the research that underpinned it. New analyses have highlighted 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. The need to consider other factors like the availability of markets for exports, the ability of domestic industry to withstand competition, and the ability of the state to support domestic entrepreneurs and regulate unfair competition hasalso been highlighted.

Inflation rate. Only countries with an inflation rate below 20% would be eligible for assistance. Although a low inflation is in general terms healthy for an economy, there is no consensus on how much is too much, particularly given the tradeoffs between level of inflation on the one hand and employment and growth of output on the other.

Country credit rating. Country credit ratings are assessments of the policy environment in a country that are prepared by private agencies to advise investors. A crucial issue with credit rating agencies is that, in spite of the large influence they have on investors’ decisions, they remain largely unaccountable. Moreover, the lack of transparency of their assessments has become a major problem for developing countries with large stocks of foreign investment. These countries have seen their attempts to put in place policies enjoying wide support among the population thwarted by negative assessments of risk that threaten to trigger an investors’ exit from the country. Using credit ratings as one of the indicators for awarding aid would institutionalize and extend the scope of the damage caused by the practices of these agencies.

RULING JUSTLY

The indicators under this cluster are also highly controversial.  Some studies have challenged the apparently straightforward relevance of high-quality institutions to economic growth on the basis of historical analysis. Indeed, these studies show that today’s developed countries became developed when they had weaker institutions than most developing countries have today. They also show that the institutions of today’s developed countries have evolved in different ways and taken different shapes. So, even if we agreed that good governance is a necessary  precondition for economic development, that does not necessarily imply an Anglo-American model of governance. Leaving aside this debate, a core problem with the measurement of good governance is the potential it offers for subjective and politicized judgments. When the country issuing the judgments has, like the U.S., a history of using aid to reward allies and promote national geopolitical goals, an added dose of skepticism is in order. Measurement of governance, thus, poses significant challenges. How to discriminate between the institutions that may be legitimate in a particular country’s social, cultural and political environment and those that belong to a particular, Anglo-American model of governance? How to ensure that the assessment is objective across countries? How to differentiate between governance problems that are due to lack of a government’s commitment to certain policies  and those that are inherent to the poverty level of a country? The fact that with two indicators, “civil liberties” and “political freedoms,” the proposed indexes are developed by the U.S. conservative organization Freedom House and are based on a paradigm that excludes economic, social, cultural, and communal rights raises serious concerns in this regard. Of particular importance under this cluster is the criterion on corruption because, as explained above, it is a pass/fail indicator. Corruption would be measured according to an index developed by the World Bank Institute. This index has been criticized for the unreliability of the data on which it is based, and the World Bank team that prepared it called repeatedly for caution in its application. There has also been note of the fact that it only emphasizes corruption in the public sector, while leaving unmentioned the dubious conduct of the private companies that are on the other end of the bribes reportedly received by public officials.

INVESTING IN THEIR PEOPLE

The indicators on this area are also not without controversy. Two of them, the primary education completion rate and the immunization rates for some specified illnesses, focus on absolute outcomes. This means that the 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.

A SOCIAL JUSTICE CHALLENGE

The Millennium Challenge Account proposal comes at a time of widespread declines in overseas development assistance. Without a doubt, as its implementation advances, it is not only going to raise U.S. aid levels, it is also going to have a strong impact on the way that U.S. development assistance is delivered. And because of the U.S. position in the world, the MCA is also likely to catalyze changes in the way that multilateral development assistance, in general, is delivered. It, thus, comes as a great tragedy that in such an influential initiative the Bush Administration has chosen to ignore the lessons from the past regarding what works and what does not in terms of promoting sustainable and equitable development. The real challenge is to educate citizens and civil society about the serious flaws in the Millennium Challenge Account, to promote discussion and debate in the media on these flaws and to advocate for changes in the paradigm for aid delivery.

Aldo Caliari is the Legal Research Scholar, Rethinking Bretton Woods Project, at the Center of Concern. This article first appeared in the Center Focus Newsletter.

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