When it was first unveiled in 2002, the Millennium Challenge Corporation (MCC) was hailed as a bold transformation of U.S. foreign aid policy. Not only did the MCC pledge to increase development assistance, it promised to do so under a competitive, performance-based model—the type of model that, while widely used in the business world, had rarely been used as an aid framework. A 2006 Harvard study called it “the most significant shift in U.S. foreign aid policy” since the Foreign Assistance Act of 1961, which established the U.S. Agency for International Development. President Bush praised it as a “new compact for global development,” in which greater contributions from developed nations would be linked to greater responsibility in developing nations, thus creating more accountable, successful partnerships.

Under the MCC system, developing countries that meet a maximum per capita income requirement (and that are not statutorily prohibited from receiving U.S. economic assistance) are evaluated on a battery of publicly disclosed, third-party indicators designed to measure a country’s performance in three vaguely defined policy areas: governing justly, investing in people, and encouraging economic freedom. If a country outperforms a majority of its peers, it is eligible to submit a proposal for funds to the MCC Board, which then allocates money based upon three criteria: the country’s performance on the indicators, plus the “opportunity to reduce poverty and generate economic growth” in the country and the overall availability of MCC funds.

Unlike many traditional aid programs, which focus on distributing aid to the neediest or most strategically important countries, the MCC targets strong performers. Theoretically, this should make MCC aid more effective. By distributing money only to countries with superior governance, the MCC offers a big incentive for domestic political reform and guards against corrupt or incompetent bureaucracies.

But six years after its introduction, the MCC finds its funding—and its record—under fire. Congress recently approved a 2008 budget appropriation that allocated only $1.54 billion for the program—roughly half the $3 billion initially requested by President Bush and nearly $208 million below the 2007 MCC budget—even while increasing overall financing for U.S. global health activities. The House Appropriations Committee cited the MCC’s “uncommitted balances”—as of December, the MCC had only distributed $155 million of its $4.8 billion project money, according to The International Herald Tribune—as the rationale for slashing federal funds.

Critics also question the utility of the MCC’s unique ex-ante indicator-based competition system. By requiring that countries reform before receiving aid, the MCC implicitly assumes that these countries possess the resources to reform or else can procure them from, say, other development agencies. This assumption has been criticized by those who argue that the poorest nations may be caught in a “poverty trap,” and are thus unable to help themselves without a “hand up.” MCC supporters respond that the poor track record of traditional “hand-up” programs argues in favor of a new system.

The MCC has shown promise. Still, as one economist warns, 'the world is more complicated than just cranking through the indicators...There’s no magic recipe for development.'

However, even proponents of an indicator-based model acknowledge that it runs the risk of becoming overly technocratic. At a recent conference hosted by the American Enterprise Institute, World Bank economist Aart Kraay stressed that “the world is more complicated than just cranking through the indicators…. There’s no magic recipe for development.” Indeed, the indicators are mere proxies for desired social outcomes. As Simeon Djankov, creator of the World Bank’s “Doing Business” series, noted at the same AEI conference, measuring miles of road does not necessarily capture infrastructure development if the road is of poor quality or goes nowhere. There is the danger that indicator-based aid might tempt applicant countries to “teach to the test,” or focus on improving specific indicators even if their unique political environment demands more immediate work on a different aspect of reform.

The MCC also raises procedural questions. Countries are subjected to heavy scrutiny before they get MCC funding—but then receive far less scrutiny once they have the aid money in hand. Although the MCC’s annual report chronicles individual success stories, “there’s not been enough careful benchmarking,” says Guido Schmidt-Traub, team leader of the Millennium Development Goal Support Team at the United Nations. His point was affirmed by a July 2006 Government Accountability Report, which found that MCC assessments were constrained by a bevy of data-collection problems.

Most worryingly, the MCC has little information on whether its unique package of incentives actually drives poverty reduction. Proponents point to “the MCC effect” as evidence of the program’s success, referring to a 2006 Harvard study which concluded (albeit with significant qualifications) that there was “substantial evidence” that countries improved their indicators because of the MCC. But the same study also warned that there was “simply too little evidence to suggest that the mix of policies stressed by the MCC [was] the right one to promote poverty reduction or that such a policy mix, equally appropriate to all impoverished nations, even [existed].” 

For their part, MCC supporters say sweeping judgments about the program’s effectiveness are premature. Although the idea for the MCC was first articulated in 2002, the government corporation was not formally established until 2004 and did not sign its first compact with a developing country until 2005. Fund dispersal and compact implementation have been slow, the result of a stipulation in the MCC’s charter and its commitment to work with partner governments. Poor nations, even those with well-run governments, were not used to planning the complex projects that would win MCC funding and needed more time to launch them, as Sheila Herrling of the Center for Global Development told the Kaiser Family Foundation in an interview. (Other U.S. aid programs, such as the President’s Emergency Plan for AIDS Relief, have been criticized for focusing exclusively on quick aid delivery, which can lead development organizations to circumvent local governments.) 

Many of the preliminary assessments are quite encouraging. At the recent AEI conference, MCC managing director for development policy Sherri Kraham recounted numerous instances in which developing-world governments had solicited information on the indicators and how they might best meet them. In the International Finance Corporation’s latest “Doing Business” report, 24 countries specifically cited the Millennium Chal­lenge Account (MCA) as their “primary motivation” for pursuing business reforms.

In the area of indicator measurement, the MCC has acknowledged its limitations and shown an eagerness to adapt when appropriate. In 2007, the MCC piloted two new performance indicators—a Natural Resources Manage­ment Index and a Land Rights and Access Index—designed to capture and encourage more environmentally sustainable practices. They will be included in the official set of indicators for 2008. The MCC is also reevaluating its education indicators.

As Danilovich acknowledges, the MCC does work mainly with “the winners” of international development. But these countries are still poor and still deserving of aid. The MCC’s budget accounts for less than 10 percent of the total U.S. foreign aid budget; as such, it may fill a small, distinct niche. “It’s a by-your-bootstraps system,” says MCC chief executive John J. Danilovich. At least for countries with bootstraps, that’s a promising approach.

Karen Porter is a research assistant at the American Enterprise Institute and an editorial assistant at THE AMERICAN.

Image by Shutterstock/Edith Ridderhof.