Order Code RL32427
Millennium Challenge Account
February 27, 2007
Specialist in Foreign Affairs
Foreign Affairs, Defense, and Trade Division
Millennium Challenge Account
In a speech on March 14, 2002, President Bush outlined a proposal for a major
new U.S. foreign aid initiative. The Millennium Challenge Account (MCA) is
managed by the Millennium Challenge Corporation (MCC) and provides assistance,
through a competitive selection process, to developing nations that are pursing
political and economic reforms in three areas: ruling justly, investing in people, and
fostering economic freedom.
The MCC differs in several respects from past and current U.S. aid practices:
the competitive process that rewards countries for past and current
actions measured by 16 objective performance indicators;
the pledge to segregate the funds from U.S. strategic foreign policy
objectives that often strongly influence where U.S. aid is spent; and
the requirement to solicit program proposals developed solely by
qualifying countries with broad-based civil society involvement.
As announced by the President in March 2002, the initial plan had been to fund
the MCC annually at $5 billion by FY2006, but this figure has not yet been reached.
The Administration sought a combined $ 9.8 billion for the MCA program, FY2004FY2007, while Congress appropriated $ 6 billion, or less than two-thirds of the total
sought. FY2007 funding is provided under the terms of a continuing resolution (H.R.
5631/P.L.109-289, as amended by H.J.Res. 20 on February 15, 2007) which provides
$1.75 billion to the MCA.
Congress authorized the MCC in P.L. 108-199 (January 23, 2004). Since that
time, the MCC’s Board of Directors has selected 25 eligible countries for FY2004
— FY2007 (another, the Gambia, was suspended in 2006) and signed eleven
Compacts with Madagascar (April 2005), Honduras June 2005), Cape Verde (July
2005), Nicaragua (July 2005), Georgia (September 2005), Benin (February 2006),
Vanuatu (March 2006), Armenia (March 2006), Ghana (August 2006), Mali
(November 2006) and El Salvador (November 2006) . Other MCA implementation
matters continue to unfold, including the relationship of MCA and USAID, how to
support “threshold” countries, and the country programs.
A growing question raised by some Members of Congress concerns the level of
funding to support MCC programs. Some fear that insufficient funds might force the
MCC to reduce the number of recipients or the size of the grants. Others, however,
believe that the slower-than-anticipated pace of Compact agreements means that the
Corporation has or will have enough resources, and have supported reductions in
MCC budget requests.
This report will be updated as events unfold.
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
MCA Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
MCC Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selection Criteria and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selecting Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Naming Candidate Countries — FY2004 . . . . . . . . . . . . . . . . . . . . . . . 7
Country Selection — FY2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Naming Candidate Countries — FY2005 . . . . . . . . . . . . . . . . . . . . . . 10
Country Selection — FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Naming Candidate Countries — FY2006 . . . . . . . . . . . . . . . . . . . . . . 13
Country Selection — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Naming Candidate Countries — FY2007 . . . . . . . . . . . . . . . . . . . . . . 16
Country Selection — FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MCA Compacts and Program Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Compact Descriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
“Threshold” Countries and Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Select Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Role of USAID and the Future of Agency Programs in MCA Countries . . 27
Funding Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
MCA Request and Congressional Action for FY2007 . . . . . . . . . . . . 28
MCA Request for FY2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Authorizing Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
List of Tables
Table 1. Status of MCA Compacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Table 2. MCA Appropriations: FY2004-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Table 3A. MCA Low-Income Candidate, Eligible, and Threshold
Countries — FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Table 3B. MCA Lower Middle-Income Candidate and Eligible
Countries — FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Table 4. MCC Performance Indicators for FY2007 . . . . . . . . . . . . . . . . . . . . . . 32
Millennium Challenge Account
Most Recent Developments1
Under the terms of a continuing resolution (H.R. 5631/P.L.109-289, as amended
by H.J.Res. 20 on February 15, 2007), the FY2007 appropriation for the MCA is
$1.75 billion, the same level as in FY2006 and $1.25 billion less than the
Administration request for that year.
On February 14, 2007, Kenya and Uganda were approved for Threshold
programs, both focusing on corruption. Yemen, suspended from Threshold program
eligibility in 2005, was reinstated due to its adoption of significant reforms.
On February 5, 2007, the Administration requested $3 billion in FY2008
funding for the MCA, a 71% increase over the FY2007 level.
In a speech on March 14, 2002, President Bush outlined a proposal for a new
program that would represent a fundamental change in the way the United States
invests and delivers economic assistance. The resulting Millennium Challenge
Account (MCA), managed by a new Millennium Challenge Corporation (MCC),
provides assistance, through a competitive selection process, to developing nations
that are pursing political and economic reforms in three areas:
Ruling justly — promoting good governance, fighting corruption,
respecting human rights, and adhering to the rule of law.
Investing in people — providing adequate health care, education,
and other opportunities promoting an educated and healthy
Fostering enterprise and entrepreneurship — promoting open
markets and sustainable budgets.
As the new agency develops, the 110th Congress will continue to debate MCA
funding issues and conduct oversight hearings on operations of the Corporation.
This report was originally written by Larry Nowels, who retired from CRS in June 2006.
The concept of the MCA is based on the premise that economic development
succeeds best where it is linked to free market economic and democratic principles
and policies, and where governments are committed to implementing reform
measures in order to achieve such goals. The MCA proposal differed in several
fundamental respects from past and current U.S. aid practices:
the size of the original $5 billion commitment;
the competitive process that will reward countries for past actions
measured by 16 objective performance indicators;
the pledge to segregate the funds from U.S. strategic foreign policy
objectives that often strongly influence where U.S. aid is spent; and
the requirement to solicit program proposals developed solely by
qualifying countries with broad-based civil society involvement.
The new initiative, which Congress authorized in January 2004 (Division D of
P.L. 108-199), was scheduled to phase in over a three-year period, beginning in
FY2004. During the first year, MCA participation was limited to the 74 poorest
nations with per capita incomes below $1,415 and that were eligible to borrow from
the World Bank’s International Development Association. The list expanded in
FY2005 to include all countries with a per capita income below $1,465 (adding
another 13 nations). Beginning in FY2006 and beyond, all lower middle-income
countries (with per capita incomes between $1, 675 and $3, 465 in FY2007) may
compete for MCC resources ( adding another 29 countries in FY2006 and FY2007).
Country selection is based largely, but not exclusively, on the nation’s record
measured by 16 performance indicators related to the three categories, or “baskets,”
of good governance, economic freedom, and investing in people. Countries that
score above the median on half of the indicators in each of the three areas qualify.
Emphasizing the importance of fighting corruption, the indicator for corruption is a
“pass/fail” test: should a country fall below the median on the corruption indicator,
it will be disqualified from consideration unless other, more recent trends suggest
otherwise. (See Table 4 below for a complete list of the 16 performance indicators.)
Administration officials, since announcing the MCA initiative in 2002, have said that
the selection process would be guided by, but not necessarily bound to the outcomes
of the performance indicators. Missing or old data, general trends, and recent steps
taken by governments might also be taken into account when annual decisions are
Eligibility to receive MCA assistance, however, does not necessarily result in
an aid grant. Once selected, countries are required to submit program proposals —
referred to as MCA Compacts — that have been developed through a broad-based,
national discussion that includes input from civil society. The focus of program
submissions may vary among countries in size, purpose, and degree of specificity,
For a more in-depth discussion of the original MCA proposal and issues debated by
Congress in 2003, see CRS Report RL31687, The Millennium Challenge Account:
Congressional Consideration of a New Foreign Aid Initiative, by Larry Nowels.
and are evaluated by the Corporation for, among other things, how well the Compact
supports a nation’s economic growth and poverty reduction goals. Only those
Compacts that meet the MCA criteria will be funded. It is expected that successful
Compacts will support programs lasting three to five years, providing a level of
resources roughly equivalent to the largest providers of assistance in the country. In
most cases, this will likely result in a significant increase of U.S. economic assistance
to MCA participant countries.
To manage the new initiative, the Administration proposed and Congress
authorized the creation of a Millennium Challenge Corporation (MCC), an
independent government entity separate from the Departments of State and the
Treasury and from the U.S. Agency for International Development (USAID). The
MCC plans for an eventual staff of about 300. It is led by a CEO confirmed by the
Senate. The current CEO is Ambassador John Danilovich. 3 A Board of Directors
oversees operations of the MCC and makes the country selections. It is chaired by
the Secretary of State and composed of the Secretary of the Treasury, the USAID
Administrator, the U.S. Trade Representative, the Corporation’s CEO, and four
individuals from the private sector drawn from lists of proposed nominees submitted
by Congressional leaders. Two of these have yet to be nominated by the White
House and confirmed by the Senate.4
The decision to house the MCA in a new organization was one of the most
debated issues during early congressional deliberations of the President’s foreign aid
initiative. The Administration argued that because the MCA represents a new
concept in aid delivery, it should have a “fresh” organizational structure,
unencumbered by bureaucratic authorities and regulations that would interfere in
effective management. Critics, however, contended that if the MCA is placed
outside the formal U.S. government foreign aid structure, it would lead to further
fragmentation of policy development and consistency. Some believed that USAID,
the principal U.S. aid agency, should manage the MCA, while others said that the
MCA should reside in the State Department where more U.S. foreign policy entities
have been integrated in recent years. At least, some argued, the USAID
Administrator should be a member of the MCC Board, which had not been proposed
in the initial Administration request.
It appears that the MCC’s status will remain unchanged under Secretary Rice’s
realignment of foreign aid authorities, announced on January 19, 2006. Randall
Tobias, the USAID Administrator, also serves concurrently in the newly created State
Department position of Director of Foreign Assistance. While gaining policy and
budget authority over nearly all USAID and State Department foreign aid programs,
the Director will play a more limited role in other agency activities, by developing
an overall U.S. government development strategy and providing “guidance” to
foreign aid programs delivered through other agencies like the MCC.
Replacing Paul Applegarth who resigned on August 8, 2005.
The two private sector Board members in place (since July 13, 2004), both proposed by
Senate leaders, are Kenneth Hackett, President and CEO of Catholic Relief Services, and
Christine Todd Whitman, former Governor of New Jersey and former head of the
Environmental Protection Agency, 2001-2003.
For FY2004, the Administration sought $1.3 billion for the MCA’s first year,
a level reduced by Congress to $994 million. The FY2005 budget proposed $2.5
billion while Congress approved $1.488 billion. Congressional reductions continued
in FY2006, as lawmakers trimmed the $3 billion request to $1.75 billion (after
adjusting for a 1% across-the-board rescission). For FY2007, the Administration
again sought $3 billion for the MCC, but, under the terms of a continuing resolution
(H.R. 5631/P.L.109-289, as amended by H.J.Res. 20 on February 15, 2007), FY2007
funding for the MCA is set at $1.75 billion, the same as the previous year. The
Administration has requested $3 billion for the MCA in FY2008.
On February 2, 2004, the Board of Directors held its initial meeting to establish
the program and agreed to Corporation by-laws. Over the following weeks the
Corporation identified “candidate” countries for that fiscal year, published the criteria
and methodology to be used for country selection, issued guidelines for Compact
proposals, and selected countries to participate in the MCA program. Although
subsequent years have seen similar steps, there have been changes in procedures and
policy as the program evolves. These are discussed below.
Selection Criteria and Methodology
The choice of criteria on which to base the eligibility of countries for threshold
and Compact programs is one of the most important elements in MCC operations.
They are a key statement of MCC development priorities. The serious consequences
of a change in criteria and the indicators related to them can be seen in the proposed
plan to adopt two natural resource indicators. If those indicators are added to the
“investing in people” basket, at least six currently eligible countries, including
Compact program holder El Salvador, fail. Splitting them between “investing in
people” and “economic freedom” baskets also changes the number and identity of
eligible countries.5 Perhaps of greater significance, the indicators themselves have
become prominent objectives of some developing countries in what Board CEO
Danilovich has called the “MCC effect.”6 Countries seeking eligibility are moving
on their own to enact reforms and take measures that would enable them to meet
MCC criteria. The criteria and the methodology for applying them have evolved over
Pursuant to reporting requirements set in the MCC legislation, the Corporation
on March 5, 2004 sent to Congress an overview of the criteria and methodology that
would be used to determine the eligibility of the 63 candidate countries in FY2004.
The report suggested that there would be relatively few and only minor changes to
the criteria and methodology that had been outlined 15 months earlier. The same 16
Steve Radelet, Sheila Herrling, Sarah Rose, Expand and Enhance: A Proposal to
Strengthen the MCA Eligibility Process When Adding the Natural Resource Indicators,
Center for Global Development, January 24, 2007.
MCC Public Outreach Meeting, February 15, 2007.
performance indicators, as listed in Table 4 below, would be utilized. In a few cases,
data sources shifted from international institutions to national governments. This
was especially true in cases where existing data for an indicator were old or
Although the Corporation did not alter any of the original 16 performance
indicators, it attempted to address additional criteria added by Congress in P.L. 108199 through the use of supplemental data and qualitative information. While the
legislative authorities broadly match criteria proposed by the Administration,
lawmakers included four additional matters on which to evaluate a country’s
performance. These relate to the degree to which a country:
recognizes the rights of people with disabilities;
supports a sustainable management of natural resources;
respects worker rights; and
makes social investments, especially in women and girls.
For an evaluation of the rights of people with disabilities, the MCC reported that it
would draw on information in the State Department’s annual Human Rights Report,
which includes a discussion of discrimination based on disability. Regarding natural
resource management, the Corporation would also use the Human Rights Report as
supplemental information on such issues as access to sanitation, deforestation,
conservation of land and marine resources, land tenure institutions, and protection
of threatened and endangered species. The State Department’s Human Rights Report
would also be used for additional information regarding worker rights, while
statistics on girls’ primary enrollment rates would supplement the four social
investment performance indicators.
The MCC also noted that it would use the most recent release (then October
2003) of Transparency International’s Corruption Perception Index to update and
supplement the World Bank’s survey data on which the corruption performance
indicator is based. This was necessary because the World Bank information was last
published in March 2003. Since the corruption indicator is a “pass/fail” measure, the
quality and timeliness of the data are especially important.
During the public comment period and at congressional oversight hearings,
some suggested that existing data sources needed to be refined or new surveys
created in order to specifically measure a country’s commitment on the four criteria
added by Congress. After further study of the criteria and methodology, the
Corporation announced on August 26, 2004, a revised set of performance indicators
that were used for the FY2005 selection process. The MCC lowered the inflation
rate threshold from 20% to 15%, making it somewhat more difficult to pass this test
(only 6 of the 63 candidate countries failed this test for FY2004). An indicator
measuring girls’ primary education completion rates replaced a broader measure used
in FY2004 that did not disaggregate primary education graduation by gender. As
noted above, including the means to measure country performance on key women
and girls issues was one of the requirements added by Congress during deliberation
on MCC authorizing legislation.
For FY2006, the Corporation made further changes in the criteria and
methodology. The most notable was the addition of a new indicator — the Cost of
Starting a Business — that replaced the Country Credit Rating, a measure that was
used in the FY2004 and FY2005 evaluation process. Data for the Cost of Starting
a Business are drawn from the World Bank’s Doing Business report, the same source
for another MCC indicator of Days to Start a Business. The Corporation believes
that not only does the new indicator have a strong correlation with economic growth,
but that it is a measurement that may encourage governments to take action in order
to improve their scores. Since the initial use of the indicator Days to Start a
Business, MCA candidates countries have introduced many business start-up
reforms, the results of which have been reflected in a lowered median for this
category. MCC officials hope that adding an indicator for the Cost of Starting a
Business will stimulate additional policy improvements. They believe that the
Country Credit Rating indicator was not as well linked to policy reforms and that it
had a greater income bias than other MCC indicators.
The Corporation also modified the principal, in selected cases, that countries
must score above the median in order to pass a hurdle, with a rule that scores at the
median will represent a passing grade. This comes into play especially for those
indicators (civil liberties, political rights, and trade policy) where performance is
measured on a relatively narrow scale of 1-5 or 1-7. A number of countries fall
exactly on the median of these indicators and the methodology change allows the
MCC to make a more refined determination of whether a country passes or fails these
The MCC further indicated that it would explore additional criteria and
methodology changes for the future. Under consideration were options to:
identify a measurement related to natural resource management; the
MCC has created a working group to study possibilities.
review other possible indicators that would better measure trade
barriers that are linked with economic growth.
consider additional gender-relation indicators; the MCC looked
closely at the indicator of Skilled Attendants at Birth (a proxy for
maternal mortality) but decided for now that the data lack the
necessary quality and coverage.7
Efforts to develop a measurement to assess a country’s commitment to policies
that promote sustainable management of natural resources (as required by MCC
authorizing legislation) culminated in the November 2006 adoption of two new
indicators to be used as supplemental information in determining FY2007 MCA
eligibility. The Natural Resources Management index is a composite of indicators:
whether the country is protecting at least 10% of its biomes, the percentage of
population with access to sanitation and clean water, and child mortality levels. The
Land Rights and Access index looks at whether land tenure is secure and access to
For a complete discussion of this issue, see Report on the Criteria Methodology for
Determining Eligibility of Candidate Countries for Millennium Challenge Account
Assistance in FY2006, at [http://www.mcc.gov], Congressional Reports.
land is equitable, and the number of days and cost of registering property. These
measures were applied for FY2007 only to supplement other indicators, in the way
that the disabilities analysis of the State Department Human Rights Report and
Transparency International’s Corruption index are currently used. However, the new
indicators may be integrated into the “Investing in People” category in FY2008.
In December 2006, Ambassador Danilovich announced that the MCC would
apply gender analysis to all aspects of the MCC program, including country selection
and Compact development and implementation.
Naming Candidate Countries — FY2004. On February 2, 2004, the MCC
Board issued a list of 63 “candidate” countries that would be reviewed for possible
selection as MCA participants in FY2004. These countries, according to authorizing
legislation, must be eligible for assistance from the World Bank’s International
Development Association, have a per capita income of $1,415 or less, and not be
otherwise ineligible to receive U.S. assistance. The latter condition eliminated
twelve countries — Burma, Burundi, Cambodia, Central African Republic, Cote
d’Ivoire, Guinea-Bissau, Liberia, Serbia, Somalia, Sudan, Uzbekistan, and Zimbabwe
— that were statutorily barred from receiving American aid.8
Country Selection — FY2004. On May 6, the MCC Board of Directors
determined that 16 countries would be eligible for FY2004 MCA funding and invited
each to submit program proposals:
As expected, the selection process raised a number of questions and concerns. The
Administration had previously said that the Board would be guided by, but not
Various types of aid restrictions applied to these countries. For several — Burundi,
Central African Republic, Cote d’Ivoire, Guinea-Bissau, and Sudan — U.S. aid was blocked
because an elected head of government had been deposed by a military coup. For Cambodia
and Uzbekistan, legislation banned FY2004 assistance to the central governments of these
countries. Aid restrictions imposed on nations not cooperating in counter-narcotics efforts
(Burma), that are on the terrorist list (Sudan), or in arrears on debt owed the United States
(Liberia, Somalia, and Zimbabwe) also applied. Serbia could not receive aid in FY2004
unless the President issued a determination stating, among other things, that the government
was cooperating with the International Criminal Tribunal. Notwithstanding these
restrictions, each country remained eligible for humanitarian assistance from the United
entirely bound to, the outcome of the performance indicator review process; that
Board members could apply discretion in their selection. Performance trends,
missing or old data, and recent policy actions might come into play during selection
deliberations, officials noted.
The final selection reflected decisions that both strictly followed the
performance indicator outcomes and applied Board discretion to take into account
other factors. Ten of the countries complied with the stated criteria: performing
above the median in relation to their peers on at least half of the indicators in each
of the three policy “baskets” and performing above the median on corruption. The
Board also examined whether a country performed substantially below average on
any single indicator and whether their selection was supported by supplemental
information. Each of the ten countries also passed these additional tests.
For ten other countries, however, some discretion was applied by the Board. In
three cases, countries which met the criteria but fell significantly below average on
one indicator were still selected by the Board due to recent policy changes or positive
trend lines. Cape Verde, for example, scored poorly on the Trade Policy indicator,
but the Board took into account the country’s progress towards joining the World
Trade Organization and implementing a value added tax that will reduce reliance on
import tariffs. Lesotho did not score well on the measurement for Days to Start a
Business. The MCC Board, however, took note of Lesotho’s creation of a central
office to facilitate new business formation and saw positive performance on other
factors related to business start-ups. Sri Lanka scored far below the median on Fiscal
Policy, but the most recent trends suggested that the government was making
progress in reducing its budget deficit.
For three other countries — Bolivia, Georgia, and Mozambique — the Board
deviated from a strict application of the selection criteria because of evidence that the
governments were taking corrective actions in the deficient areas. Bolivia fell at the
median (as opposed to above the median) on the corruption indicator, something that
would eliminate it from consideration. The Board, however, noted that President
Mesa, who took office in October 2003, had created a cabinet position to coordinate
anti-corruption activities and an office to investigate police corruption. Georgia, with
a newly elected government that had created an anti-corruption bureau and taken
other steps to fight corruption, was also selected despite scoring below the median
on corruption and three other “ruling justly” indicators. Mozambique, which failed
on corruption and each of the four “investing in people” indicators, was chosen based
on supplemental data that was more current than information available from the
primary data sources. This evidence, the Board felt, demonstrated Mozambique’s
commitment to fighting corruption and improving its performance on health and
On the other hand, the MCC Board chose not to select four countries that
technically met the performance criteria but fell substantially below the median on
one or more indicator. In each of these cases, the Board did not believe that the
government was taking any action to improve its performance. Although Bhutan,
Mauritania, and Vietnam passed the corruption hurdle and half of the “ruling justly”
indicators, they scored very low on the measurements for Political Rights and Civil
Liberties, and in Vietnam’s case, on the Voice and Accountability indicator. A fourth
country — Guyana — was also not selected despite passing the necessary hurdles.
It scored particularly low on the Fiscal Policy measurement.9
It has been long assumed by MCC officials and close observers of the MCA
initiative that when the country selections were announced, there would be
disagreements and possible surprises in the final list, especially if the Board exercised
its discretionary authority as it did for FY2004 participants. Representative Lowey,
for example, expressed her view at a May 13, 2004 House Appropriations Committee
hearing that East Timor, which failed to pass the “economic freedom” hurdle in part
due to missing data on two of the indicators, should have been selected. CEO
Applegarth responded that East Timor is a new nation and that it was premature to
conclude that it was a “high-performing” country. He acknowledged, however, that
East Timor should be given close consideration in the future if the current trend lines
Besides East Timor, some suggested that Kenya should have been included
because of its new government’s commitment to education and anti-corruption
efforts. USAID Administrator Natsios acknowledged at the May 13 hearing that
Albania was a “close call,” failing because it scored slightly below the median on
corruption. Like Albania, Malawi and Moldova would have qualified on the basis
of performance if not for slightly failing scores on corruption. Several small island
states, including Kiribati, Sao Tome, and Tonga, were not selected even though the
absence of data for several categories may have played a role.10
Despite these questions over specific country eligibility, the selection process
appeared to have satisfied two major concerns that have been consistently expressed
over the past year. Based on earlier analysis, some argued that Africa would be
under-represented in the final selection process, with perhaps as few as three regional
states participating. In fact, eight, or half of the first year qualifying nations are from
Selection of countries that would give the appearance of geostrategic
considerations was an additional concern of many who view the absence of securityrelated factors from MCA decision-making as one of the most attractive features of
the initiative. For the most past, the Board appeared to have avoided this concern.
Had the Board used its discretionary powers to select Indonesia, for example, some
critics would have likely charged that the decision stemmed more from Jakarta’s role
in the war on terrorism than on strict policy performance. Indonesia passed all
necessary hurdles except for corruption. Some, nevertheless, have questioned
whether Georgia’s selection was driven by broad U.S. foreign policy objectives of
assisting a smooth political transition in the country rather than a choice based on
For a complete statement regarding the Board’s rationale, see Report on the Selection of
MCA Eligible Countries for FY2004, found at [http://www.mcc.gov], “Congressional
As noted below, East Timor, Albania, and Sao Tome were subsequently selected as three
of the first seven “threshold” countries that will receive assistance to help the country meet
the MCA requirements.
performance.11 Likewise, Bolivia, a country in which the United States maintains
strong counter-narcotics goals, had been experiencing a period of instability despite
strong performance prior to October 2003. Both Georgia and Bolivia were selected
despite not strictly meeting the MCA performance criteria.
Naming Candidate Countries — FY2005. On July 20, 2004, the MCC
Board of Directors launched the initial step in the FY2005 selection process by
naming 70 candidate countries, 7 more than were reviewed for FY2004. After
adjusting the per capita income upward to $1,46512 and dropping the requirement that
a country must be an IDA-eligible borrower from the World Bank, 11 new countries
were added to the list: China, Egypt, Equatorial Guinea, Iraq, Morocco, Paraguay,
Philippines, Swaziland, Turkmenistan, Tuvalu, and Ukraine. Four countries fell off
the FY2005 list that had qualified in FY2004 — Albania, Bosnia and Herzegovina,
Cape Verde, and Tonga — because their per capita income grew beyond the $1,465
cutoff. Thirteen other nations were excluded because they were ineligible for other
U.S. economic assistance.13
Country Selection — FY2005. Meeting on November 8, the MCC Board
of Directors made its selection of FY2005 eligible countries:
The Board chose one new country for FY2005 — Morocco — while 15 of the 16
nations included for FY2004 were determined eligible again for FY2005. Cape
Verde was not selected due to the fact that its per capita GNI exceeded the $1,465
ceiling. Cape Verde, however, remained eligible for MCA support using FY2004
funds. Board selections represented both a high degree of continuity between
See Steve Radelet, A Note on the MCC Selection Process for 2005, September 23, 2004,
found at [http://www.cgdev.org].
The MCC plans to adjust the per capita income threshold each year to correspond to the
per capita income cutoff of the “historic ceiling” of IDA lending, a calculation made by the
World Bank. After 2006,when all lower middle-income countries became eligible to
compete, the MCC also adjusted that threshold — $3,465 in 2007 — in the consideration
of determining candidate countries.
Eleven of these countries were also excluded in FY2004. Serbia, which was barred from
consideration for FY2004, exceeded the per capita income limit for FY2005 so was not
under consideration. Syria and Cuba, which became potential candidate countries beginning
in FY2005, were excluded because of a ban on direct aid to the countries. See Footnote 5,
above, for a complete list of countries and aid restrictions.
FY2004 decisions as well as a sharp difference in the degree to which it applied its
discretionary authority for qualifying or denying countries for FY2005.
Continuity in the FY2005 Selection Round. The fact that each country
(except Cape Verde) selected for FY2004 MCA participation was also declared
eligible for FY2005 should not be surprising, given the nature of the MCA concept.
The Board identified in May 2004 what it determined to be the 16 “best performers”
based on the assumption that these countries had, and would continue to express, a
strong commitment to the types of economic, governance, and social policy reforms
measured by the MCC. Absent a substantial negative development since May, there
was a presumed expectation that these same countries would score well in a
subsequent performance comparison with their income peers. Moreover, except in
some extreme situations, evidence of a slide in policy performance as measured
through the various data sources would likely lag behind the actual policy shift and
not be reflected in the immediate data updates.
In addition, two other factors that may not apply in future years seem to have
affected the outcome for FY2005. First, with the selection dates for FY2004 and
FY2005 coming only six months apart — rather than one year, as should be the case
in the future — it was likely that the data would indicate less change than might be
the case if the comparisons occurred over a longer period. Between May and
November, several of the data sources upon which the 16 performance indicators are
based did not update or revise their figures.14 As a result, the review of countries for
FY2005 was based on much of the same data and rankings as had been the case for
the FY2004 selection.
Moreover, the addition of 13 new countries for consideration in the FY2005
round had the effect for at least six of the indicators of lowering the median against
which countries were compared. Because of this, if a country scored well — above
the median — in the FY2004 selection decision, it was likely that it would score the
same or better in the review for FY2005 where medians declined. For example, in
May, Bolivia fell exactly at the median on the corruption indicator. But, in
November, when the median for corruption dropped somewhat after new countries
were added, Bolivia scored above the median even though Bolivia’s score on
corruption did not change. This phenomena is unlikely to be repeated again to the
same extent since countries in the low-income group will be added or subtracted only
if their economy grows beyond the per capita income ceiling or U.S. foreign aid
sanctions are applied or lifted since the last review. The net effect is that the core set
of low-income countries competing for MCA selection is unlikely to change as much
as it did in FY2005, thereby reducing the extent to which the median will be altered
simply because of the addition of new countries.
This is not true for the performance indicators of Inflation and Primary Girls Graduation
Rate, which were modified for the FY2005 selection, or for the indicators measuring Days
to Start a Business, Civil Liberties, and Political Freedom which were updated in 2004. For
some of the other economic and social investment indicators where data were drawn from
national sources, revised figures were used in the FY2005 selection, but only where
available. World Bank data for six governance-related indicators and the Trade Policy
measurement, however, were not revised between May and November 2004.
Excluding More Countries that Qualified. Despite the degree of
continuity between FY2004 and FY2005 in the selection of eligible countries, the
MCC Board departed somewhat from the previous round by not selecting a large
number of countries that technically met the MCA performance criteria. Many
observers raised questions over the FY2005 selections regarding the countries that
were not selected rather than those that were.
As noted above, in May 2004, the Board chose not to select four countries —
Bhutan, Guyana, Mauritania, and Vietnam — although each passed the minimum
number of indicators. The Board decided to exclude these four because they scored
“substantially below” the median on one or more measurements, although without
defining precisely what represented a mark “substantially below”the median.
For FY2005, the Board did not select 10 countries that met the criteria,
including three of the four left out of the FY2004 round (Mauritania did not meet the
minimum qualifications). In addition, for FY2005 Burkina Faso, China, Djibouti,
Egypt, Nepal, the Philippines, and Swaziland met the minimum standards but were
not selected. The Corporation offered little explanation as to why these countries
were not chosen.15 It appears, however, that scoring “substantially below” — perhaps
in the lowest 25th percentile — has become a de-facto criteria for exclusion. For
example, the Corporation’s CEO Paul Applegarth commented that the Philippines,
a country that passed 13 of the 16 indicators, did not qualify because Manilla scored
“substantially below” the median on tests for health expenditures and fiscal policy,
and that more recent trends indicated the fiscal policy situation was deteriorating
further.16 Each of the other nine nations that met the minimum qualifications but
were not selected also had one score in the 25th percentile, although the Corporation
has not commented on whether this was the reason for not choosing them.
Another possible reason for limiting the number of qualifying countries in the
FY2005 round might be due to funding reductions that were anticipated in early
November. The Administration had requested combined FY2004/FY2005
appropriations of $3.8 billion, but was more likely, at the time of selection, to have
available 25%-35% less, depending on the outcome of congressional debate on the
FY2005 budget. Corporation officials have said that reduced funding would lead to
fewer countries assisted and/or smaller grants per country, a situation that would be
complicated further by qualifying additional nations.
Instead, the Board of Directors invited three of these 10 countries — Burkina
Faso, Guyana, and the Philippines — to participate in the Threshold Program,
intended to help “near-miss” nations take steps to strengthen areas that would help
The MCC’s authorizing legislation (section 608(d)) requires the Corporation’s CEO to
provide justification to Congress regarding only those countries declared as eligible for
MCA assistance and for those selected for Compact negotiation. Otherwise, there is no
statutory requirement for the MCC to comment on its decision-making process, including
the rationale for not selecting specific countries.
Comments by Paul Applegarth at a State Department Foreign Press Center Briefing,
November 9, 2004.
them qualify for full MCA assistance in the future. Burkina Faso became the first to
sign a Threshold Agreement on July 22, 2005.
Another Board departure in the FY2005 selection process was to avoid using its
discretionary authority to qualify countries that did not meet the minimum
performance indicators. In May, the Board chose three nations — Bolivia, Georgia,
and Mozambique — that did not pass the so-called “hard-hurdle” of corruption. The
latter two again qualified despite falling below the median on corruption, while
Bolivia did not require an exemption after the median dropped below its score with
the addition of new countries. For FY2005, five nations — Malawi, Moldova,
Paraguay, Tanzania, and Ukraine — passed the required number of performance
indicators, except corruption. Although Malawi, Paraguay, and Tanzania are
Threshold Countries, none of the five were chosen for full MCA status.
Naming Candidate Countries — FY2006. On August 5, 2005, the MCC
released a list of 69 low-income countries and 29 lower middle-income nations that
were evaluated for MCA grants in FY2006. The number of low-income nations —
those with a per capita GNI of less than $1,575 — was one less than the previous
year (Equatorial Guinea was dropped) while all of the lower middle-income group,
with per capita GNI between $1,575 and $3,255, were new to the MCA selection
process.17 Fifteen nations were excluded from the FY2006 candidate country list
because they are ineligible under existing law to receive U.S. economic aid. Most
had been barred in prior years as well.18
Country Selection — FY2006. On November 8, 2005, the MCC Board of
Directors made its selection of FY2006 eligible countries, and, for the first time,
selected participants in both the low-income and lower middle-income groups.
All 17 countries previously selected in FY2004 or FY2005, or both years, again
qualified in FY2006. Four new low-income countries were added for FY2006 —
Burkina Faso, East Timor, The Gambia, and Tanzania — plus two new lower
middle-income nations — El Salvador and Namibia.19 None of the four low-income
Each year, the MCC adjusts the low-income country per capita income threshold to
correspond to the per capita income cutoff of the “historic ceiling” of IDA lending, a
calculation made by the World Bank. The range of per capita GNI for the lower middleincome group is also drawn from the World Bank.
For several — Burundi, Central African Republic, Cote d’Ivoire, and Sudan — U.S. aid
is blocked because an elected head of government has been deposed by a military coup. For
Cambodia and Uzbekistan, legislation bans FY2005 assistance to the central governments
of these countries. Aid restrictions imposed on nations not cooperating in counter-narcotics
efforts (Burma), that are on the terrorist list (Cuba, Iran, North Korea, Sudan, and Syria),
not complying with minimum trafficking in persons standards (Burma and Sudan), or in
arrears on debt owed the United States (Somalia, and Zimbabwe), also apply. Serbia and
Bosnia and Herzegovina are not eligible for aid in FY2005 unless the President issues a
determination stating, among other things, that the governments are cooperating with the
International Criminal Tribunal.
Cape Verde was also selected in the new lower middle-income country grouping. Cape
nations were surprising. Three — Burkina Faso, East Timor, and Tanzania — were
chosen last year as Threshold countries, meaning they were “near-misses” in
FY2005. The Gambia improved its scores significantly between FY2005 and
FY2006, including those for inflation, fiscal policy, controlling corruption, and other
governance indicators. The rationale for selecting any lower middle-income
countries, on the other hand, and El Salvador and Namibia in particular, is less clear,
as discussed below.
Lower Middle-Income Countries
* New for FY2006.
Although selected only seven months previously, The Gambia’s eligibility for
MCA assistance was suspended by the MCC Board on June 16, 2006, due to “a
disturbing pattern of deteriorating conditions” in half of the 16 conditions that are
used to determine candidate countries. Among the problems cited in this case were
human rights abuses, restrictions on civil liberties and press freedom, and worsened
Greater Board Selectivity. Given the likelihood that the MCC would have
substantially less appropriated funds for FY2006 than it had requested, a number of
observers argued that now was not the time to expand the list of eligible countries to
a great extent, especially for cases where Board discretion would be necessary to
qualify a country that did not pass a sufficient number of indicators. Instead, many
asserted, the Board should be more selective, keeping the number of new participants
to a few so that future Compacts could be larger and emphasize “transformational”
development opportunities as the MCA program envisioned.
Verde, however, had been previously chosen in FY2004 when its income placed it in the
low-income grouping, and signed an MCA Compact on July 4, 2005.
The Board seemed to heed this advice for the low-income group by not choosing
eight countries that qualified and not using its discretionary powers to select any new
nations that failed to meet the minimum requirements.20 Bhutan, China, and Vietnam
passed enough hurdles but did not qualify, as was the case the past two years, based
on very low scores on political rights and civil liberties. Kiribati, the Philippines, and
India were not selected most likely because some of their scores were substantially
below the median, which has become a marker used by the Board previously. India
also presents a challenging case for the Board in that, despite qualifying, it is a
country with a significantly large poor population which would require a sizable
MCA Compact in order to produce a reasonable degree of impact on poverty
reduction. It is also a nation with the means to attract capital and investment from
other sources. Egypt, also not selected, falls into a somewhat different category as the
second largest recipient of annual U.S. assistance based on a strategic rationale. The
reason for not selecting Uganda, despite having passed 12 of the 16 indicators and
not falling significantly below the median on the other 4, is less obvious.
Selection of Lower Middle-Income Countries was Less Clear.
Whether to include relatively more wealthy nations — in FY2006 those with a percapita income higher than $1,575 — in the MCA program has been debated since the
launch of the initiative. A number of analysts have argued that especially given the
less-than-anticipated budget available to the MCC, the Board should refrain from
selecting any lower middle-income countries (LMICs), at least in the FY2006
Of the eight LMICs (out of 32 total) that passed sufficient performance hurdles,
the Board chose two to participate in FY2006. In addition, the Board also selected
Cape Verde, a country that passed only two of the six economic performance
indicators and therefore, did not technically qualify.22 It appears, however, that the
Board could have decided to select none of the lower middle-income nations by using
criteria it had applied consistently in the two previous rounds. Moreover, it was not
clear why the Board chose the two that did qualify and excluded others.
All eight LMICs that passed the performance indicator test fell significantly
below the median on at least one of the indicators. El Salvador and Namibia, the two
that were selected, both had low scores on fiscal policy. El Salvador also scored well
below the median on the costs of starting a business, while Namibia also did poorly
on days to start a business and immunization rates. The other six that were not
chosen — Brazil, Bulgaria, Jordan, Samoa, Thailand, and Tunisia — also performed
substantially below the median in at least one area, although Jordan was selected to
Georgia and Senegal were selected despite not passing the necessary hurdles, but both had
been chosen in FY2004 and FY2005.
See, for example, Steve Radelet, Kaysie Brown, and Bilal Siddiqi, “Round Three of the
MCA: Which Countries are Most Likely to Qualify in FY 2006?” Center for Global
Development, October 27, 2005.
Cape Verde had been classified as an eligible low-income country in FY2004 and signed
a Compact in July 2005. The Cape Verde case, however, also points out a limitation in
using the system of 16 performance indicators. For two of the economic categories, no data
are available for Cape Verde, resulting in a failing score on those hurdles.
participate in the Threshold program. What separated these latter six from El
Salvador and Namibia, however, was not explained by the Board.
Naming Candidate Countries — FY2007. On August 11, 2006, the MCC
released a list of 69 low-income and 29 lower middle-income countries to be
candidates for MCA grant eligibility. The number of low-income countries — those
with per capita GNI of less than $1,675 — and lower middle-income countries —
those with per capita GNI of $1,675 to $3,465 — was the same as the previous year.
However, China and Morocco have been dropped from the low-income group — the
former is restricted by human rights concerns and the latter has moved to the lower
middle-income list, and replaced by Burundi and Central African Republic, both no
longer restricted by military coup prohibitions. Thailand has been removed from
lower middle-income list due to its coup and Romania has moved up to the ranks of
upper middle-income countries. New entries are Montenegro and Morocco. Fifteen
countries were excluded from the FY2007 candidate country list because they are
ineligible under existing law to receive U.S. economic aid. Most had been barred in
prior years as well.
Country Selection — FY2007. On November 8, 2006, the MCC Board
added three new countries to the list of those eligible for MCA grants — Moldova,
Jordan, and Ukraine.
Lower Middle-Income Countries
* New for FY2007.
Even prior to the selection, the possible choice of Jordan had come in for severe
criticism. Freedom House, the organization whose annual Index of Freedom is
drawn upon for two of the “Ruling Justly” indicators, had urged the MCC Board to
bypass countries that had low scores on political rights and civil liberties. It argued
that countries like Jordan that fall below 4 out of a possible 7 on its index should be
automatically disqualified. Jordan, however, did well on three of the six other
indicators in this category. Several development analysts further argued that Jordan
should not be selected, because the MCA is not an appropriate funding source. They
assert that Jordan already is one of the largest recipients of U.S. aid, has access to
private sector capital, and is not a democracy. 23 In selecting Jordan, the MCC Board
appears not to have been swayed by these arguments.
Another concern expressed by observers regarding the FY2007 selection process
is that four of eleven current Compact countries — Ghana, Benin, Madagascar, and
Cape Verde — would fail if measured under FY2007 indicators. While it was not
expected that existing Compact funding would be withdrawn as it is based on
eligibility in previous years, some had hoped the Board would send a signal of
disapproval of such lapses. However, the MCC Board did not address this issue at
the November candidate selection meeting.
MCA Compacts and Program Proposals
Once declared as eligible, countries may prepare and negotiate program
proposals with the MCC. The proposals are referred to as MCA Compacts. Only
those Compacts that demonstrate a strong relationship between the program proposal
and economic growth and poverty reduction will receive funding. Not all qualified
MCA countries may submit successful Compacts.
While acknowledging that Compact contents likely will vary, the Corporation
expects each to discuss certain matters:
a country’s strategy for economic growth and poverty reduction,
impediments to the strategy, how MCA aid will overcome the
impediments, and the goals expected to be achieved during
implementation of the Compact;
why the proposed program is a high priority for economic
development and poverty reduction and why it will succeed; the
process through which a public/private dialogue took place in
developing the proposal;
how the program will be managed, monitored, and sustained after
the Compact expires;
the relationship of other donor activities in the priority area;
examples of projects, where appropriate;
a multi-year financial plan; and
a country’s commitment to future progress on MCA performance
The Corporation did not set hard deadlines for Compact submissions in order
to allow countries adequate time to conduct a national dialogue over the contents of
Freedom House, “Millennium Challenge Corporation Should Hold Countries to Higher
Standards of Democratic Governance,” November 2, 2006 [http://www.freedomhouse.org];
Sheila Herrling, Steve Radelet, and Sarah Rose, “Will Politics Encroach in the MCA
FY2007 Selection Round? The Cases of Jordan and Indonesia,” Center for Global
Development, October 30, 2006, [http://www. dgdev.org].
the program proposal.24 By December 1, 2004, the MCC had received proposals and
“concept papers” from 15 of the 16 FY2004 eligible countries, and began the next
phase — negotiating formal Compacts — with several countries. The MCC signed
its first Compact, with Madagascar, on April 18, 2005, an event that was followed
by four other signings in 2005 — with Honduras (June 13), Cape Verde (July 4),
Nicaragua (July 14), and Georgia (September 12). In 2006, six more agreements
were signed: Benin (February 22), Vanuatu (March 2), Armenia (March 27), Ghana
(August 1), Mali (November 13) and El Salvador (November 29).25
Two features of the first series of Compacts have drawn particular attention.
First, most of the Compacts include a similar sector concentration, focusing on
agriculture and transportation infrastructure projects. While these activities are well
justified, the similarity across Compacts is somewhat surprising. Given the wide
diversity of conditions in each of the countries, plus the Corporation’s willingness
to support all types of programs, many observers had expected to see a greater degree
of variation among the Compacts. Some believe that social sectors, including those
in health and education, should be receiving greater attention in Compact design.
Others had expected greater variety in aid delivery mechanisms, and are concerned
that the MCC is reluctant to approve sector grants and other types of budget support
assistance. While there can be greater accountability risks associated with this kind
of aid, countries that qualify for MCA support are selected because they have already
demonstrated stronger performance in managing resources and fighting corruption.26
As subsequent Compacts are signed, the issue of sector focus is likely to be closely
A second closely examined characteristic of the early Compacts has been the
dollar size of the grants; or more specifically, the lower-than-anticipated funding
level for the first several Compacts. While Administration officials have said
repeatedly that Compacts will be funded at various levels depending on the nature
and potential impact of the proposal, the presumption has been that the MCA grant
would represent a sizable increase in U.S. assistance to the eligible country. In order
to realize its potential as a “transformational” aid program and to provide sufficient
incentives to countries requesting “breakthrough” projects, the MCC says that the
size of its grants must place MCA assistance among the top aid donors in a country.27
Some had estimated that once the Corporation’s budget reached $5 billion, each
H.R. 4014, introduced on October 7, 2005, expresses the sense of Congress that the MCC
should encourage countries to submit Compact proposals within one year of being declared
eligible, enter into a Compact within two years, and to consider removing countries from the
status of eligibility if they do not comply with these guidelines in a timely and good faith
Details on each of the negotiated Compacts can be found at the MCA website:
James Fox and Lex Rieffel, The Millennium Challenge Account: Moving Toward Smarter
Aid. The Brookings Institution, July 14, 2005, p. 24.
See, for example, Millennium Challenge Corporation FY2005 Budget Justification, p. 7.
Found at [http://www.mcc.gov/about/reports/congressional/budgetjustifications/budget_
Compact would be supported with annual resources in the $150-$200 million range.28
These levels could vary up or down depending on many factors, such as the number
of people living in poverty, the size of the economy, and the scope of the proposed
Most of the first several Compacts, however, do not appear to meet the
anticipated financial allocation thresholds. Madagascar’s four-year, $110 million
Compact roughly doubles U.S. assistance to the country, but does not place MCA
assistance among the top donors. France is the largest bilateral donor, disbursing on
average $189 million per year, 2001-2004. The European Commission’s aid
program, 2001-2004, averaged $82 million per year, while the World Bank’s
International Development Association has been Madagascar’s largest source of
concessional assistance of about $209 million lent in each of 2001 through 2004.29
The $110 million Compact for Madagascar is also not very large relative to the
country’s population. Of the 16 qualified countries for FY2004, Madagascar has the
fourth largest population (16.4 million), and might have been expected to receive one
of the larger MCA grants given its population size and its per capita income ($230,
second lowest among the 16 MCA countries).
For Honduras (a $215 million MCA program over five years), Georgia ($295
million over five years), and Armenia ($236 million over five years), the United
States has been the top bilateral donor in recent years without the MCA program, and
will likely remain in that position once the MCA grants begin to disburse. But the
MCA Compact for Honduras calls for only a slightly higher annual amount than
current U.S. economic assistance provides, while Georgia’s Compact will average
only about three-fourths and the Armenia Compact only about two-thirds of the
annual level of present American aid. While these are not insignificant amounts of
new resources, they are far less than Administration officials had suggested
In contrast, the six five-year Compacts with Cape Verde ($110 million), Benin
($307 million), Vanuatu ($66 million), Ghana ($547 million), Mali ($461 million),
and El Salvador ($461 million) represent a substantial investment by the United
States, relative to the current size of American aid and the size of their economies.
USAID, which last provided direct bilateral assistance to Cape Verde in the mid1990s, does not maintain a mission presence, allocating small amounts of aid through
regional programs. The Compact’s $22 million annual average will place the United
States second to Portugal, Cape Verde’s former colonial power, as the leading donor,
and represent more than a quarter of total bilateral development aid grants from all
sources compared with figures for 2003 and 2004. Likewise, the United States does
not maintain a bilateral program with Vanuatu, limiting direct aid through the Peace
Prepared statement of Steve Radelet, Senior Fellow at the Center for Global Development,
before a hearing of the House International Relations Committee, April 27, 2005.
Organization for Economic Cooperation and Development (OECD), Geographical
Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition.
For example, USAID Administrator Natsios remarked in an October 22, 2002 speech at
the American Embassy in London that “we estimate in most countries the MCA will provide
funding 5 to 10 times higher than existing levels” of U.S. assistance.
Corps. The $13 million annual average of the Vanuatu program will place the United
States as the country’s top aid donor, along with Australia. In Benin, USAID
manages an annual bilateral economic aid program of about $15 million, compared
with the $61 million annual size of the MCC Compact. The Compact appears likely
to place the MCC as the top aid donor, together with France, for Benin.31
This issue has been a priority of Ambassador Danilovich since his September
27, 2005 confirmation hearing to be the MCC’s new CEO. He noted that the MCC
was “meant to create transformative programs,” and to do so he said that “future
Compacts will generally need to be larger than those signed thus far.” Ambassador
Danilovich cautioned, however, that with limited resources but larger Compacts,
fewer countries will receive funding if MCC is to achieve its transformational goal.32
His record since assuming the CEO position appears to be moving towards larger
Compacts and placing the MCC as the largest donor in recipient countries.
Compact Descriptions. The eleven Compacts agreed up to this point are
Madagascar. The Madagascar Compact is a four year, $110 million program,
focusing on rural agriculture development and poverty reduction. Specifically, the
project has three objectives: 1) to increase land titling and land security ($36 million);
2) to expand the financial sector and increase competition ($36 million); and 3) to
improve agricultural production technologies and market capacity in rural areas ($17
million). According to the MCC, the Compact is designed to assist Madagascar’s
rural poor, which account for 80% of the nation’s impoverished population, and
generate income by expanding opportunities to own land, to access credit, and to gain
technical training in agriculture and market identification.
Elements of the design, negotiation, and completion of the Madagascar Compact
met several of the key criteria of the MCA process. For example, discussions
regarding the scope and purpose of the MCA grant occurred at the regional and
national level in Madagascar that included broad representation of civil society.
Management and oversight of the Compact will be handled by a new entity, MCAMadagascar, whose Steering Committee will include government and nongovernment officials. Both of these steps underscore the “country-ownership” and
broad participatory nature of MCA programs. The Compact also includes fiscal
accountability requirements concerning audits, monitoring, and evaluation that
support the transparency concept of the MCA. While the $110 million MCA grant
will be fully obligated when the Compact enters into force, resources will be
transferred periodically following a determination that performance continues
satisfactorily. This funding plan emphasizes the MCA principles of accountability
Geographical Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006
Prepared statement of John J. Danilovich, before the Senate Committee on Foreign
Relations, September 27, 2005.
Honduras. The five-year, $215 million MCA Compact with Honduras focuses
on two objectives — rural development and transportation. The rural development
project, representing $72.2 million of the Compact, will assist small and medium-size
farmers enhance their business skills and to transition from the production of basic
grains to horticultural crops, such as cucumbers, peppers, and tomatoes. According
to the MCC, these vegetable crops will generate about $2,000 to $4,000 in annual
income per hectare, compared with roughly $500 for basic grains. The project
intends to provide farmers with the appropriate infrastructure and necessary training
for producing and marketing these different crops. The transportation project,
totaling $125.7 million of the Compact, will improve the major highway linking
Honduran Atlantic and Pacific ports, and major production centers in Honduras, El
Salvador, and Nicaragua. Rural roads will also be upgraded, helping farmers
transport their goods to markets at a lower cost. Specific results sought in the
double productivity in 15,000 hectares in rural areas
expand access to credit for farmers by over 20%
upgrade the major road that links Honduras with commercial centers
upgrade about 1,500 kilometers of rural roads
Cape Verde. The MCC and Cape Verde have signed a five-year, $110 million
Compact focused largely on improving the country’s investment climate,
transportation networks, and agriculture productivity. The program’s goal is to
increase the annual income in Cape Verde by at least $10 million. The Compact
evolves around three projects:
Private Sector Development — with $7.2 million and additional
participation with the International Finance Corporation, the project
aims to remove constraints to private sector investment.
Infrastructure — the project will invest $78.7 million in road and
bridge construction to help link the nine inhabited islands and
improve transportation links to social services, employment
opportunities, local markets, and ports and airports.
Watershed Management and Agriculture Support — by investing
$10.8 million to increase the collection, storage, and distribution of
rainfall water, the project hopes to increase agricultural production
and double the household income of farmers.
Nicaragua. The five-year, $175 million Compact with Nicaragua will focus
on the promoting economic growth primarily in the northwestern region of the
country where potential opportunities exist due to the area’s fertile land and nearby
markets in Honduras and El Salvador. The Compact has three components: 1) to
strengthen property registration ($26.5 million); 2) to upgrade primary and secondary
roads between Managua and Leon and to provide technical assistance to the Ministry
of Transportation ($92.8 million); and 3) to promote higher-profit agriculture
activities, especially for poor farmers, and to improve water supply in support of
higher-value sustainable agriculture.
Georgia. The $295 million, five-year agreement with Georgia focuses on
reducing poverty and promoting economic growth in areas outside of the capital
where over half the population lives in poverty. The Compact is divided into two
projects. The first and the largest component ($211.7 million) concentrates on
infrastructure rehabilitation, including roads, the north-south gas pipeline, water
supply networks, and solid waste facilities. The Enterprise Development Project
($47.5 million) will finance an investment fund aimed at providing risk capital and
technical assistance to small and medium-sized businesses, and support farmers and
agribusinesses that produce commodities for the domestic market. The program
reduce in the incidence of poverty by 12% in the Samtskhi-Javakheti
provide direct benefits to 500,000 people and indirectly benefit over
25% of Georgia’s population;
reduce the travel time by 43% to Tbilisi, the capital, from regional
areas, thereby cutting transportation costs for farmers, businesses,
and individuals needing health and other social services; and
lower the risk of a major gas pipeline accident and improve the
reliability of heat and electricity to over one million Georgians.
Armenia. The five-year, $236 million Compact concentrates on the
agricultural sector, investing in the rehabilitation of rural roads ($67 million) and
improving irrigation ($146 million). The program anticipates that it will benefit
about 750,000 people, 75% of Armenia’s rural population, by improving 943
kilometers of rural roads and increasing the amount of land under irrigation by 40%.
In signing the Compact, however, the MCC issued a cautionary note, signaling
Armenia that it must maintain its commitment to the performance indicators on
which the country was selected, or risk suspension or termination of the Compact.
In September 2005, the MCC expressed concerns with Armenian officials regarding
slippage on two of the governance indicators and matters raised by international
groups concerning political rights , political freedom, and an independent media in
the country. Moreover, the MCC Board delayed final approval following the
November 27 constitutional referendum after allegations of fraud, mismanagement,
limited access by the press, and abuse of individuals were raised. 33
Vanuatu. The $65.7 million, five-year Compact targets improvements broadly
in multiple types of infrastructure, including roads, wharfs, an airstrip, and
warehouses. The objective is to increase the average per capita income by 15%, by
helping rural agricultural producers and providers of tourism-related goods and
services. The Compact further aims to help strengthen Vanuatu’s Public Works
Department in order to enhance capacity to maintain the country’s entire transport
See letter of John Danilovich to Armenia President Robert Kocharyan on December 16,
Benin. Benin, one of the world’s poorest countries with the lowest Human
Development Index ranking of any MCC Compact nation, has been approved for a
$307 million, five year program focused on four sectors:
Land rights, reducing the time and cost of obtaining property title;
Financial services, helping micro, small, and medium-sized
Justice reform, assisting the judicial systems capacity to resolve
business and investment claims; and
Market access, improving the Port of Cotonou.
The Compact’s goal is to benefit five million people, bringing 250,000 of the
population out of poverty by 2015.
Ghana. The five-year $547 million Compact focuses on agriculture and rural
development. Poverty rates in the three targeted geographic areas are above 40%.
The agriculture component ($241 million) will provide training for farmer-based
organizations, improve irrigation, provide greater access to credit, and rehabilitate
local roads. The transport component ($143 million) will seek to reduce transport
costs to farmers by improving key roads, such as the one between the capital and the
airport, and an important ferry service. Rural development programs ($101 million)
will construct and rehabilitate education, water, and electric facilities, among other
Mali. The five-year $461 million Compact emphasizes an increase in
agricultural production and expansion of trade. About half the funds ($234.6
million) will support a major irrigation project, including modernization of
infrastructure and improvements in land tenure. Improvements in the airport ($89.6
million) will target both passenger and freight operations. An industrial park project
located at the airport ($94.6 million) will assist agro-processing and other industry.
El Salvador. The five-year $461 million Compact will address economic
growth and poverty reduction concerns in El Salvador’s northern region where more
than half the population lives below the poverty line. Education as well as water and
sanitation, and electricity supply ($95.1 million); support for poor farmers and small
and medium-sized business ($87.5 million); and transportation, including roads
($233.6 million) are the chief elements of program.
Table 1. Status of MCA Compacts
Mar. 27, 2006
Living Below $2
-Land and property
Feb. 22, 2006
July 4, 2005
- Private sector
Sept. 12, 2005
August 1, 2006
June 13, 2005
Living Below $2
April 18, 2005
- Land titling
- Financial sector
July 14, 2005
- Land titling
March 2, 2006
-Public Works Dept.
Population Living Below $2 Per Day — data from the World Bank, World Development Report, 2007; Gross National Income per capita — 2005 data from the World Bank, World
Development Report, 2007. Human Development Index Rank — from UNDP, Human Development Report, 2006.
U.S. Economic Aid — Department of State. MCA Compact information — Millennium Challenge Corporation.
a. The Human Development Index (HDI) is compiled by the U.N. Development Program and is published annually in the UNDP Human Development Report. It is a composite index
that measures the average achievements in a country in three basic dimensions of human development: a long and healthy life, as measured by life expectancy at birth; knowledge,
as measured by the adult literacy rate and the combined gross enrolment ratio for primary, secondary and tertiary schools; and a decent standard of living, as measured by GDP
per capita in purchasing power parity (PPP) U.S. dollars. The most recent report (2006) evaluates 177 countries, with number 1 having the best HDI and number 177 scoring
the worst in the Index.
“Threshold” Countries and Programs
In order to encourage non-qualifying countries to improve in weak areas, the
United States will help governments that are committed to reform to strengthen
performance so that they would be more competitive for MCA funding in future
years. Congress provided in authorizing legislation that not more than 10% of MCA
appropriations could be used for such purposes, stating that the funding could be
made available through USAID. Subsequent foreign operations appropriations have
made 10% of new MCA appropriations available for this Threshold assistance.34
According to the Threshold Program Policy guidance issued by the
Corporation,35 the program will assist countries make policy reforms and institutional
changes in areas where they failed to meet the MCA performance criteria. In order
to qualify, countries must submit concept papers identifying:
where and why the country failed to pass specific indicators;
proposals for policy, regulatory, or institutional reforms that would
improve the country’s performance on these indicators; and
types of assistance, over a two-year maximum period, required to
implement these reforms.
If the Corporation, in consultation with USAID, determines that the concept
paper shows sufficient commitment to reform and a promise of success, the country
will prepare a Threshold Country Plan that specifically establishes a program
schedule, the means to measure progress, and financing requirements, among other
considerations. USAID is charged with overseeing the implementation of Threshold
Country Plans, including working with countries to identify appropriate
implementing partners such as local, U.S., and international firms; NGOs; U.S.
government agencies; and international organizations. Like regular MCA Compacts,
funding is not guaranteed for each country selected for the Threshold Program, but
will be based on the quality of the Country Plan.
Twenty-one countries are currently eligible for threshold assistance. Yemen,
suspended in November 2005 following a significant decline in meeting the
eligibility criteria, was re-instated in February 2007 due to its adoption of a series of
significant reforms. To date, the threshold programs of thirteen countries totaling
$309 million have been approved by the MCC Board — Albania, Tanzania, Burkina
Faso, Malawi, Moldova, Philippines, Zambia, Jordan, Indonesia, Ukraine, Paraguay,
Kenya, and Uganda.36
Initially, assistance for Threshold countries was authorized only for FY2004. The MCC
Authorization bill, H.R. 4014, as reported by the House International Relations Committee,
would make the 10% set-aside for threshold programs permanent.
Found at [http://www.MCC.gov].
Countries that are eligible but have not yet been awarded threshold program support are
Eleven of the thirteen programs seek to improve country scores on the
corruption indicator. Several countries have multiple objectives. Indonesia, for
example, targets corruption and immunization indicators. Albania focuses on
corruption and improvements in its business environment. The Burkina Faso
program is designed to improve girls’ primary education, targeting areas of the
country with the lowest primary completion rates.
Role of USAID and the Future of Agency Programs in MCA
As noted above, how USAID would participate in the MCA initiative has been
a continuing concern of Congress and various policy analysts. Legislation
authorizing the MCC requires the Corporation’s CEO to coordinate with USAID and
directs the Agency to ensure that its programs play a primary role in helping
candidate countries prepare for MCA consideration. Corporation and USAID
officials have said there will be close collaboration between the two entities, although
the precise nature of the relationship has yet to be made public. USAID maintains
missions in 20 of the 25 eligible countries and might be expected to support MCC
programs, through contracting, procurement, and monitoring tasks.
Another question is how USAID will adjust its own programs in MCA
countries, especially where the Agency maintains relatively small activities in
relation to other donors. Since the goal is to provide resources that will make MCA
programs among the largest aid operations in a country, it was anticipated that
USAID spending would fall well below amounts provided through MCC Compacts.
For example, in Mongolia, where U.S. aid programs have totaled $10-$12 million
annually in recent years, the United States was the fourth largest bilateral donor in
2002, representing less than a quarter of the size of Japan’s economic aid
disbursements. In Ghana, Senegal, and Sri Lanka, USAID maintains larger programs
but spends far less than other countries and multilateral agencies. But in the case of
the first Compacts for Madagascar, Honduras, and Nicaragua, the MCA grants are
only somewhat larger on a per-year average ($28 million for Madagascar, $43 million
for Honduras, and $35 million for Nicaragua) than USAID’s “core” economic aid
programs (about $22 million for Madagascar, $34 million for Honduras, and $32
million for Nicaragua). For Georgia, the Compact’s average level of $59 million is
below USAID’s $68 million allocation for FY2006.
Like other issues involving USAID, this question remains under review.
USAID Administrator Natsios told the House Appropriations Committee on May 9,
2004 that the Agency would not withdraw from or cut programs in MCA countries,
Guyana, Krygyz Republic, East Timor, Sao Tome and Principe, Niger, Peru, and Rwanda.
The latter three were added on November 8, 2006.
but would not increase spending either. He said, however, that USAID would work
to ensure that its programs operate in an integrated way with MCA-funded activities.
Nonetheless, some critics continue to express concern that MCA funding is not
always additive, as had been the pledge, but will substitute for portions of previous
USAID bilateral development aid programs. The FY2008 budget request offers a
look at how funding levels may be affected by MCA Compacts. In every Compact
country where there has been a bilateral economic assistance program, that assistance
would be reduced under the FY2008 budget plan from FY2006 levels.
In each year since the MCA was established, its enacted appropriation has been
well below the President’s request. In each year, the MCC proposal was also by far
the largest increase sought by the Administration in the Foreign Operations
appropriations bill and viewed by many observers as one of the most vulnerable
items in an increasingly difficult budget environment.
Table 2. MCA Appropriations: FY2004-2008
(in $ billions)
MCA Request and Congressional Action for FY2007.
Administration sought a $3 billion appropriation for FY2007. The MCC had
estimated that it would exhaust all existing appropriations from FY2004-FY2006 by
the second quarter of FY2007, leaving nine then-eligible countries, plus any new
nations selected for FY2007 to be funded out of the FY2007 appropriation. In
testimony before the House Foreign Operations Appropriations Subcommittee on
March 29, 2006, CEO Danilovich argued that a funding level less than $3 billion
would require the MCC to delay the negotiation and approval process for new
Compacts. He further asserted that without full funding, the ability of the MCC to
leverage reforms and provide incentives to eligible countries would be diminished.
Some, including Subcommittee Chairman Kolbe, questioned whether the MCC
could pick up the pace of signing new Compacts to the degree required to utilize the
full $3 billion request for FY2007. Ambassador Danilovich said the Corporation has
learned from its first two years of operations and has accelerated several steps in the
evaluation and approval process.
On June 9, 2006, the House approved the FY2007 Foreign Operations
appropriations, H.R. 5522, reducing the FY2007 MCA funding level to $2 billion.
The Appropriation Committee’s report on the legislation (H.Rept. 109-486) said that
the panel continued to strongly support the MCC and that the proposed reduction
stemmed solely from the constrained budget environment and the need to allocate
resources to other Presidential and congressional priorities.
On June 29, 2006, the Senate Appropriations Committee approved its version
of the FY2007 State/Foreign Operations appropriations, providing $1.9 billion for the
Millennium Challenge Corporation, $1.1 billion below the Administration request.
Like the House, the Senate Committee report (S.Rept. 109-277) offered strong
support to the MCC and noted that, in allocating funds, it was restricted by broader
budget constraints. The Committee directed the Director of Foreign Assistance at
State to submit a report no later than 15 days after the signing of a compact assessing
its place within the context of the overall foreign aid program in a country and noting
any possible resulting duplication of programs. It also suggested that judicial reform
should be part of MCC compacts and raised a concern that education has not yet been
a major part of compacts. The Committee directed that the MCC submit a report
regarding steps it is taking to address social and environmental costs resulting from
infrastructure investments. The full Senate did not take up the foreign operations
Under the terms of a continuing resolution (H.R. 5631/P.L.109-289, Division
B as amended by H.J.Res. 20 on February 15, 2007), $1.75 billion was provided in
FY2007 funding for the MCA.
MCA Request for FY2008. On February 5, 2007, the Administration
requested a FY2008 appropriation of $3 billion for the MCA. In its budget
presentation, the MCC argued that currently available resources are expected to be
fully utilized on Compacts likely to be signed this year, including Lesotho, Morocco,
Mozambique, Tanzania, and Sri Lanka. Expected to be left in the pipeline for
funding in FY2008 are nine to ten countries, possibly including Jordan, Moldova,
and Ukraine. If fully funded at $3 billion, the MCC could support about six of these
compacts in FY2008.
On July 13, 2006, the House International Relations Committee reported a
measure, H.R. 4014 (H.Rept. 109-563), that would have authorized MCC
appropriations (“such sums as may be necessary”) for fiscal years 2007 through 2009
and made a number of policy modifications to the original legislation and to the
operations of the Corporation. These included allowing Compacts to last up to ten
years, instead of the five currently permitted; allowing two concurrent Compacts,
rather than the current one; and requiring notification to authorizing and
appropriating Committees 15 days prior to signing a Compact (as in the procedures
of reprogramming notifications under section 634A of the Foreign Assistance Act),
in place of existing language requiring that the MCC consult with “appropriate
committees” prior to negotiating a Compact. H.R. 4014 received no further
consideration in the 109th Congress. The requirement of an authorization of foreign
aid programs has been routinely waived in annual Foreign Operations appropriations
bills, as the FY2007 continuing resolution measure did in the case of currently
unauthorized foreign aid programs, including the MCA.
Table 3A. MCA Low-Income Candidate, Eligible, and Threshold
Countries — FY2007
Criteria: Per capita income $1,675 and below, and not prohibited from receiving
other U.S. economic assistance.
Eligible Countries are in Bold.
Threshold Countries are followed with (TC)
Income* East Asia/Pacific Income* Latin America Income*
$1,350 East Timor (TC)
Central African Rep
Papua New Guinea
Congo, Dem Rep of
Congo, Rep of
Kyrgyz Rep. (TC)
* Gross National Income, dollars per capita, 2005. World Bank, World Development Indicators, On
** Precise data unavailable.
Table 3B. MCA Lower Middle-Income Candidate and Eligible
Countries — FY2007
Criteria: Per capita income between $1,675 and $3,465, and not prohibited from
receiving other U.S. economic assistance.
Eligible Countries are in Bold
Threshold Countries are followed with (TC)
Income* East Asia/Pacific
$2,990 Marshall Islands
* Gross National Income, dollars per capita, 2005. World Bank, World Development Indicators On
** Precise data unavailable. Montenegro figure is based on combined Serbia and Montenegro.
Table 4. MCC Performance Indicators for FY2007
Investing in People
Control of Corruption
Source: World Bank Institute
Public Primary Education Spending as % of GDP
Sources: UNESCO and National governments
Inflation (must be below 15%)
Voice and Accountability
Source: World Bank Institute
Primary Girls’ Education Completion Rate
Sources: World Bank and UNESCO
Source: National governments and IMF World
Source: World Bank Institute
Public Expenditure on Health as % of GDP
Sources: World Health Organization (WHO)
Source: The Heritage Foundation, Index of
Rule of Law
Source: World Bank Institute
Immunization Rates: DPT and Measles
Sources: World Health Organization (WHO)
Source: World Bank Institute
Source: Freedom House
Days to Start a Business
Source: World Bank
Source: Freedom House
Cost of Starting a Business
Source: World Bank
Supplemental Indicator for FY2007
Measuring Sustainable Management of Natural Resources
Natural Resources Management [Source: Columbia Center for Int’l Earth Science Info Network (CIESIN) and Yale Center for Env. Law and Policy (YCLEP)
Land Rights and Access: Access to Land [Source: International Fund for Agricultural Development (IFAD)] and Cost of Property Registration [Source: International
Finance Corporation (IFC)]