Order Code RL31687
Report for Congress
Received through the CRS Web
The Millennium Challenge Account:
Congressional Consideration of a New Foreign
Aid Initiative
January 3, 2003
Larry Nowels
Specialist in Foreign Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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The Millennium Challenge Account: Congressional
Consideration of a New Foreign Aid Initiative
Summary
In a speech on March 14, 2002, at the Inter-American Development Bank,
President Bush outlined a proposal for the United States to increase foreign economic
assistance beginning in FY2004 so that by FY2006 American aid would be $5 billion
higher than three years earlier. The new funds, which would supplement the current
estimated $12.87 billion economic aid budget, would be placed in a Millennium
Challenge Account (MCA) and be available on a competitive basis to a few countries
that have demonstrated a commitment to sound development policies and where
U.S. support is believed to have the best opportunities for achieving the intended
results. These “best-performers” will be selected based on their records in three areas
– ruling justly, investing in people, and pursuing sound economic policies.
Development of a new foreign aid initiative by the Bush Administration has
been influenced by a number of factors, including the widely perceived poor track
record of past aid programs, recent evidence that the existence of certain policies by
aid recipients may be more important for success than the amount of resources
invested, the war on terrorism, and the March 2002 U.N.-sponsored International
Conference on Financing for Development in Monterrey, Mexico.
The MCA initiative will be limited to countries with per capita incomes below
$2,975, although in the first two years – FY2004 and 2005 – only countries below the
$1,435 level will compete for MCA resources. Participants will be selected based
on a transparent evaluation of a country’s performance on 16 economic and political
indicators, divided into three clusters corresponding to the three policy areas of
governance, economic policy, and investment in people. Eligible countries must
score above the median on half of the indicators in each area. One indicator – control
of corruption – is a pass/fail measure, meaning a country must score above the
median on this single measure or be excluded from further consideration.
The Administration proposes to create a new entity – the Millennium Challenge
Corporation (MCC) – to manage the initiative. The MCC will be supervised by a
Board of Directors chaired by the Secretary of State and including other cabinet
officials. Several other key issues – FY2004 funding levels, number of participating
countries, types of programs supported, and monitoring mechanisms – have yet to be
determined.
Congress will play a key role in the approval of the initiative by considering
authorization and funding legislation, and in confirming the head, or CEO, of the
proposed Millennium Challenge Corporation. A number of issues are likely to be
addressed in the congressional debate, including country eligibility criteria,
performance indicators used to select participants, creation of a new agency to
manage the MCA, and budget considerations. Congress will also maintain
continuing oversight of the program during its lifetime.
This report will be updated and expanded when the Administration submits its
legislative and budgetary requests early in the 108th Congress.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background of the Millennium Challenge Account Initiative . . . . . . . . . . . . . . . . 3
Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Outlines of the MCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
MCA features announced by the Administration . . . . . . . . . . . . . . . . . 5
MCA issues undecided within the Administration . . . . . . . . . . . . . . . . 5
The MCA and Congressional Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Country Eligibility and Income Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Issue: Income eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Performance Indicators and Selection Process . . . . . . . . . . . . . . . . . . . . . . . 8
Issue: Association of performance indicators with economic
growth and poverty reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Issue: Hurdles and median vs. aggregated ranking . . . . . . . . . . . . . . . 12
Issue: Data accuracy and availability . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Issue: MCA Board of Directors discretionary authority . . . . . . . . . . . 13
Implications for Other U.S. Assistance Programs . . . . . . . . . . . . . . . . . . . . 14
Issue: Commitment to global initiatives . . . . . . . . . . . . . . . . . . . . . . . 14
Issue: Policy coherence and USAID program goals in MCA
countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Organizational Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Issue: The need for a new organization . . . . . . . . . . . . . . . . . . . . . . . . 15
Issue: Role of MCC staff in managing and monitoring the MCA . . . . 16
Issue: Future of USAID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Program Development and Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Issue: Detailing the types and targets of programs . . . . . . . . . . . . . . . 18
Legislative and Funding Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Issue: Flexibility and congressional directives and oversight . . . . . . . 19
Issue: Funding and possible tradeoffs . . . . . . . . . . . . . . . . . . . . . . . . . 19
Appendix A – U.S. Aid Compared to Other Major Donors and the Impact
of the MCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix B – Potential MCA Participants: Country Categories . . . . . . . . . . . . 24
List of Figures
Figure 1. ODA Performance 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
List of Tables
Table 1. MCA Performance Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 2. Millennium Challenge Account Funding . . . . . . . . . . . . . . . . . . . . . . . 22

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The Millennium Challenge Account:
Congressional Consideration of a New
Foreign Aid Initiative
Introduction
In a speech on March 14, 2002, at the Inter-American Development Bank,
President Bush outlined a proposal for the United States to increase foreign economic
assistance beginning in FY2004 so that by FY2006 American aid would be $5 billion
higher than three years earlier. He further pledged to maintain economic aid amounts
at least at this level into the future. The funds would be placed in a new Millennium
Challenge Account (MCA) and be available on a competitive basis to a few countries
that have demonstrated a commitment to sound development policies and where
U.S. support will have the best opportunities for achieving the intended results.
These “best-performers” will be selected based on their records 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 that sustain an educated and healthy population.
! Pursuing sound economic policies that stimulate enterprise and
entrepreneurship – promoting open markets, sustainable budgets,
and opportunities for economic growth.
If fully implemented, the initiative would represent one of the largest increases
in foreign aid spending in half a century, outpaced only by the Marshall Plan
following World War II and the Latin America-focused Alliance for Progress in the
early 1960s. Administration officials characterize the MCA as representing the most
comprehensive policy change ever in how the United States designs, implements, and
monitors development assistance to low and lower-middle income nations. In
particular, Executive officials emphasize the “results-based” aspect of the initiative
in which countries will be selected based on past and current performance, and
programs will be evaluated on and required to show measurable achievements that
impact favorably on economic growth and poverty reduction.
Conditioning assistance on policy performance and accountability by recipient
nations is not a new element of U.S. aid programs. Since the late 1980s at least,
portions of American development assistance have been allocated by the U.S.
Agency for International Development (USAID) to some degree on a performance-
based system. What is significantly different about the MCA is that the entire $5
billion money pool – which is nearly twice the size of the current USAID “core”

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CRS-2
development aid budget – will be tied to performance and results. Moreover,
program proposals will be based on national development strategies developed by the
countries themselves, with a U.S. role limited to providing technical assistance in
project design. Further, in another major departure from past policy, the MCA is
intended to focus exclusively on development goals without being influenced by
other U.S. foreign policy and geo-strategic objectives that often strongly influence
U.S. aid decision making. Nevertheless, while new details regarding country
eligibility, selection criteria, and organizational structure were announced in
December, many issues have not yet been decided and remain under review by the
Executive branch.
Congress will play a key role in the approval of the initiative by way of
considering authorization and funding legislation, and in confirming the head, or
CEO, of the proposed Millennium Challenge Corporation that will manage the MCA.
Congress will also maintain continuing oversight of the program as it is implemented
and additional funding is sought in subsequent years. Among numerous policy issues
for Congress raised by the MCA proposal are:
! Country eligibility: Should the MCA target both low and lower-
middle income countries, as proposed by the Administration, or
should it focus exclusively on the poorest nations where the needs
are the greatest and where access to other financial resources is
limited? And, if both, how should funds be allocated between the
two groups?
! Performance indicators and selection process: Will the indicators
and the methodology proposed by the Administration identify the
“best performers”?
! Implications for other U.S. development aid programs: How will
the MCA affect global and country aid programs not part of the new
initiative?
! U.S. organizational structures: Is the proposed Millennium
Challenge Corporation, with a staff of 100, the most appropriate
structural model for managing the MCA? What are the implications
for the U.S. Agency for International Development, the primary
government bilateral aid agency?
! Program development and selection: What types of activities
should the MCA fund and how will these programs be designed?
! Legislative and funding matters: What should be the relationship
between MCA authorizing legislation and current foreign aid laws
and legislative practice? What are the budgetary implications on the
MCA?

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CRS-3
Background of the Millennium Challenge Account
Initiative
Context
The concept of the Millennium Challenge Account is based on the premise that
economic development succeeds best where it is linked to sound economic and good
governance policies, especially where these conditions exist prior to expanding
resource transfers. Past failures of economic aid provided by the United States and
other international donors, some argue, have been caused to a large extent by a lack
of attention to performance and the requirement for measurable results.1 Executive
branch officials say that the MCA abandons the process of basing aid allocations on
promises by recipient governments to initiate policy changes in the future, and
instead will make those decisions based on achievements already made and policies
that are currently working.2
This view has been joined by a growing body of literature in the late 1990s
concluding that there was little relationship between the amount of development aid
provided and success in raising economic levels and reducing poverty. Rather, some
researchers argued that foreign assistance produced the greatest impact where the
recipient country had already adopted sound policies.3 Others have concluded that
international development assistance has largely failed and will continue to do so
unless the donor community fundamentally shifts its focus to support real policy
change.4 Despite many development successes in such areas as agricultural
production and child immunization, Representative Jim Kolbe, Chairman of the
House Appropriations Foreign Operations Subcommittee, calculates that for 97
countries receiving $144 billion (constant dollars) in U.S. aid since 1980, the median
per capita gross domestic product (GDP) has declined from $1,076 to $994 in 2000.5
Also influencing the debate over the launch of a new foreign aid initiative are
the terrorist attacks of September 11and an evaluation of their causes. There remain
differences of perspective regarding a possible direct relationship between poverty
and terrorism, especially given the fact that many terrorist leaders come from
1 Others will argue, however, that of equal or perhaps more importance has been the close
ties of U.S. foreign assistance with more strategic and geo-political goals where
development results have been of secondary importance for policymakers charged with aid
allocations and policy formulations.
2 See remarks by Andrew Natsios, Administrator, USAID, at the U.S. Embassy in London,
October 21, 2002. [http://www.usaid.gov/press/spe_test/speeches/2002/sp021021.html]
3 See, for example, Craig Burnside and David Dollar, “Aid Spurs Growth – in a Sound
Policy Environment,” Finance and Development, December 1997; and Paul Collier and
David Dollar, “Aid Allocation and Poverty Reduction,” The World Bank, January 1999.
4 See, for example, William Easterly, “The Failure of Development,” Financial Times, July
3, 2001.
5 Remarks of Rep. Jim Kolbe to the Advisory Committee on Voluntary Foreign Aid
(ACVFA), October 9, 2002.

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CRS-4
relatively wealthy backgrounds, but most agree that it can be a contributing factor.
President Bush, in announcing the MCA on March 14, 2002, made numerous
references to the war on terrorism, noting that “We also work for prosperity and
opportunity because they help defeat terror.” He further emphasized that although
poverty does not cause terrorism, “poverty prevents governments from controlling
their borders, policing their territory, and enforcing their laws. Development provides
the resources to build hope and prosperity, and security.”6
Accompanying this was a renewed interest in global development aid funding
levels as governments, international institutions, and non-governmental organizations
prepared for a mid-March 2002 U.N.-sponsored International Conference on
Financing for Development in Monterrey, Mexico. Conference proponents hoped
the session would serve as a catalyst for donors to increase aid commitments in order
to achieve by 2015 the ambitious goal of reducing poverty by one-half relative to
1990. At the 2000 Millennium Summit, international leaders, including the United
States, had pledged support for a set of specific targets, including those related to
hunger, education, women’s empowerment, child health, HIV/AIDS, and other
infectious diseases, that became known collectively as the Millennium Development
Goals. A World Bank analysis, released February 2002, estimated that to achieve
these goals by 2015, donors would need to increase spending by $40 to $60 billion
per year, or roughly double the amount currently provided.7 As the Monterrey
conference approached, international development advocates began pressing
participating governments to issue specific pledges that would help close this funding
gap identified by the World Bank.
Outlines of the MCA
Following the President’s speech in March, an inter-agency team, including
representatives from the National Security Council, Office of Management and
Budget, State Department, USAID, and the Department of Treasury, met frequently
to work out proposals to design and implement the U.S. initiative. The NSC
managed overall policy development while the State Department took charge of
outreach – seeking input from the non-governmental community – and the Treasury
Department assembled economic and governance indicators that would be used to
determine eligible countries. The team drafted recommendations on many, but not
all MCA issues, and after being approved by the Secretaries of State and Treasury,
the proposals were forwarded to the President.
After making further modifications, on November 25 President Bush endorsed
several key principles of the initiative. Thereafter, the process of drafting legislation,
deciding on budget levels for FY2004, and consulting with Congress began. While
several important issues have been decided, others remain under discussion as the
6 President Proposes $5 Billion Plan to Help Developing Nations. Remarks by the President
on Global Development at the Inter-American Development Bank, Washington, D.C., March
14, 2002.
7 World Bank, Goals for Development: History, Prospects, and Costs, by Shantayanan
Devarajan, Margaret Miller, and Eric Swanson, April 2002. Text available at
[http://econ.worldbank.org/view.php?topic=19&type=5&id=13269].

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CRS-5
MCA framework evolves. These issues are highlighted below and discussed in more
detail in the following section on the MCA and congressional consideration.
MCA features announced by the Administration. The Administration
has issued proposals on a number of key MCA elements, some of which will be
incorporated into authorizing legislation considered by Congress early in the 108th
Congress.
! Country eligibility. In the first year – FY2004 – 74 countries that
can borrow from the World Bank’s International Development
Association (IDA) with a per capita income below $1,435 are
eligible. The list will expand to 115 over the next two years to
include all countries with per capita GNI less than $2,975. (For
complete list, see appendix B.)
! Selection criteria and performance indicators. MCA participants
will be selected based on their performance measured by 16
economic and political indicators. In most cases, a score above the
group median on the indicator would represent a passing “grade”.
The MCA Board of Directors will be guided by the statistical
outcomes, but maintain some discretion over the final selection.
! Corruption measure is “pass-fail”. To be eligible, a country must
score above the median on the corruption indicator, as compiled by
the World Bank Institute.
! Program development and submission. MCA programs will be
“country-driven” in which participating country officials will design
and submit project proposals based on national development
objectives.
! Organizational management of the MCA. The Administration
will ask Congress to create a new entity – the Millennium Challenge
Corporation (MCC) – that will be supervised by a Board of Directors
chaired by the Secretary of State and made up of other cabinet
officials.
MCA issues undecided within the Administration. Beyond some of
these key decisions, other matters remain under discussion.
! FY2004 funding. President Bush pledged that by FY2006 funding
for the MCA would total $5 billion. But the pace of reaching the $5
billion level in three years has not been decided and may depend on
how many countries are expected to qualify to receive funding. The
proposed FY2004 level will be included in the President’s budget
submitted in early February 2003.
! Number of countries participating. Because the MCA will be a
“performance-driven” program, it is difficult to predict how many
nations will qualify and participate. Administration officials have

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CRS-6
suggested, however, that the number will be relatively small –
perhaps less than 20 by the third year. It is also undecided whether
all or only some of the countries that qualify based on the
performance indicators will receive MCA funding. The final list
may comprise selections from the pool of best performing countries
or the selection could be based on the quality of program proposals
submitted by qualifying nations. Other options are also under
review.
! Impact on USAID program objectives in MCA countries. MCA
participants may or may not continue to receive regular development
aid under existing USAID programs. If they do, it is unclear
whether those activities will change focus in order to support MCA
projects. The role of USAID missions in MCA countries is also yet
to be clearly stated.
! Types of programs supported. Whether MCA programs will be
limited to budget support for government initiatives, infrastructure
projects, or more targeted activities focused on specific sectors, or
be available for the full range of development alternatives remains
open. All options, according to Administration officials, remain
under consideration, as does the question of directing MCA
resources to the private sector and non-governmental organizations.
! MCC operations. Beyond deciding to house the MCA in a new
“corporate-like” structure, consensus has not been reached over how
the staff will be selected, how the MCC will proceed in
implementing the initiative, and what role, if any, non-governmental
experts will play in the MCC.
! Monitoring and accountability. Executive officials say that MCA
programs will be closely monitored and scrutinized, perhaps by
some independent auditing system, but they have not established
plans or procedures.
! Graduation or exit strategies. A main objective in providing an
increased resource pool to help “jump-start” or accelerate a
country’s development process, is to set it on the road toward
graduation. What criteria to use to end programs in successful
countries or how to withdraw from a non-performing MCA
participant remain undecided.
The MCA and Congressional Consideration
As Congress considers MCA authorizing legislation, funding recommendations,
and confirmation of the MCC chief officer, followed by continuing oversight of
program implementation, several key elements of the initiative are likely to be closely

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CRS-7
examined. These will include matters that have already been decided within the
executive branch, as well as issues that remain under discussion.
Country Eligibility and Income Levels
One of the first questions addressed by the executive steering committee was
where the income cutoff point should be drawn for purposes of defining potential
MCA participants. The debate chiefly focused on whether only the poorest nations
should be considered for MCA programs. As noted above, the Administration
announced in late November that a pool of 115 countries, phased in over three years,
will compete for MCA resources. They will be grouped into three clusters according
to income level and World Bank borrowing status, with a new cluster added to the
competition each year corresponding to the anticipated rise in MCA resources. In
FY2004, only the 74 IDA-eligible countries with per capita incomes below $1,435
can compete, while 12 more will be added the next year.8 By FY2006, when $5
billion is planned for MCA programs, countries with per capita incomes between
$1,435 and $2,975 – 29 in number – will be added. Since countries above $1,435 per
capita income are likely to score higher on the eligibility indicators, the White House
further has decided to have separate competitions for the low and low-middle income
groups to avoid income bias.
Issue: Income eligibility. There emerged at the outset a relatively broad
consensus within the U.S. development community that the MCA should focus on
IDA-eligible, low-income countries.9 For a policy aimed at promoting economic
growth and reducing poverty, most agreed that it made sense to place emphasis where
the greatest needs existed. By expanding the number and income level of MCA
participants beyond IDA-eligible status, some argued, the amount of money available
for the poorest nations would be reduced. One analyst noted further that the 29
member low-middle income group includes nations that maintain strong political and
strategic ties with the U.S. – Egypt, Jordan, Colombia, Turkey, and Russia. That
would increase the possibility, or at least the perception, that countries might be
selected on criteria other than MCA performance measures.10 Achieving economic
results as an objective has frequently taken a position secondary to strategic interests
in U.S. aid allocation considerations in the past.
In addition, some point out that the poorest countries have far less access to
capital from private sources, making MCA resources even more valuable to them.
8 IDA-eligible borrowers total 81. While most fall below the $1,435 gross national income
(GNI) per capita level, seven small island countries with incomes above this level also can
borrow from IDA. See Appendix B for a complete list of countries falling into each income
grouping.
9 Two non-governmental organizations, for example, argued that the MCA should limit
participation exclusively to IDA-eligible countries. See InterAction. The Millennium
Challenge Account: A New Vision for Development, May 2002; and Catholic Relief
Services, Improving Effectiveness: Recommendations for the Millennium Challenge
Account, June 24, 2002.
10 Steve Radelet, Qualifying for the Millennium Challenge Account, Center for Global
Development, December 13, 2002, p. 4.

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CRS-8
According to one analysis, aid as a percent of gross national income (GNI) for IDA-
eligible countries with per capita incomes below $1,435 totals 10.8% compared with
1.4% for the higher income group (below $2,950); gross private capital flows as a
percent of GDP for the poorer IDA-eligible countries (below $1,435) is 6.9% while
those between $1,435 and $2,975 receive 10.3%. Tax revenues and domestic savings
as a percent of GDP among low-middle income countries are roughly double the
level of those for IDA-eligible borrowers below $1,435, thus providing a more
expansive potential source of financing.11
Others, however, argue that low-middle income countries deserve equal
consideration in a program intended to identify and partner with the “best-
performers.” In some cases, they assert, commitments to sound policies have enabled
nations to move into the higher income range. If a primary goal of the MCA is to
maximize the effectiveness of aid resources, then non-IDA countries should be
included.12 In addition, countries falling in the $1,435 - $2,950 per capita income
range, while maintaining higher income levels, also have large numbers of people
living in poverty. These countries, with stronger institutions and better capacity may
also be better positioned to apply MCA resources more effectively.
One argument of those favoring exclusive participation of countries below the
$1,435 level – that better-off economies would score higher on the eligibility
indicators, raise the median standards for qualification, and squeeze out the poorest
nations – seems to be addressed by the Administration. Based on a preliminary
estimate of the median scores of each group, the median would be higher – and in
some cases significantly higher – for 14 of the 16 indicators for low-middle income
countries compared with those below $1,435 GNI per capita.13 In FY2006, when the
29 higher-income countries become eligible, they will be evaluated separately from
the other 86, competing against each other to score above the group median on the
16 indicators. This will allow countries to qualify based on comparisons with their
income-level peers. Whether the Administration will divide MCA resources into two
pots of money for each income group has not been determined. In any case, unless
the Administration and Congress agree to increase the MCA beyond the proposed $5
billion target, whatever number of low-middle income nations that qualify will
reduce the amount of resources that would otherwise be available for those below the
$1,435 level.
Performance Indicators and Selection Process
Executive branch decisions on which performance indicators to use have been
guided by whether the data and methodology are transparent, publically available,
11 Radelet, Qualifying for the Millennium Challenge Account, Appendix, p. 3.
12 Paolo Pasicolan and Sara J. Fitzgerald, The Millennium Challenge Account: Linking Aid
with Economic Freedom. The Heritage Foundation, October17, 2002, p. 2.
13 The two indicators for which this would not be the case are trade policy, which would be
the same for each group, and three-year budget deficits. However, because qualification
under the latter indicator is set at a specified threshold – less than 20 percent – group
medians would have no impact on whether a country passed this hurdle. Source: CRS
analysis based on data compiled by Steve Radelet, Center for Global Development.

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CRS-9
accurate, and easy to understand. Another key factor is whether the data source
provides full coverage for as many countries as possible and is relatively current.
Officials further sought to identify indicators that would be few in number but
sufficient to reflect broad policy results in each of the three policy categories, and
valid relationships between the indicators and economic growth and poverty
reduction. Finding indicators that meet all of these requirements is difficult, and
according to some, impossible. Gathering valid economic, social, and political
statistics, especially in developing nations, has always been difficult, often resulting
in significant gaps in coverage and long lag times. Gaining consensus on whether a
given set of indicators accurately measures policy achievements unfettered of
institutional bias by whatever organization or individuals collect and interpret the
data is also a major challenge.
As noted above, the Administration has settled on 16 indicators for measuring
performance and determining country eligibility. As shown in Table 1, six fall within
each of the ruling justly and encouraging economic freedom categories, while four
will determine results in the area of investing in people. Sources include
international institutions, such as the World Bank, IMF, and U.N., and non-
governmental and private organizations like Freedom House, Heritage Foundation,
and the Institutional Investor Magazine. National statistics will also be drawn upon
where gaps occur, but none of the data sets will be compiled by the U.S. government.
For aggregating country scores, the Administration has decided to use a
“hurdles” approach instead of adding up the results and ranking nations top to
bottom. To qualify, a country must score above the median on half of the indicators
in each policy area; in other words, a country’s ranking must be above the median of
all 74 countries in the first year on three of the six indicators for ruling justly and
economic freedom, and two of the four for investing in people. The one exception
to the median standard is the inflation indicator – a country’s inflation must be below
20 percent in order to pass that hurdle. Officials believe that the hurdle methodology
will demonstrate that a country is committed in all three areas and more precisely
identify policy weaknesses. In year three and beyond, when low-middle income
countries are added to the competition, there will be separate evaluations for
countries below and above $1,435 per capita incomes so that higher income countries
will not drive up the median and exclude poorer nations from qualifying.
Importantly, one indicator – control of corruption – will be a “pass-fail” test, in
which any country scoring at or below the median on this measure will be
disqualified regardless of performance on any of the other 15 indicators. Executive
officials argue that since there are strong links between financial accountability and
economic success, a strong commitment to fight corruption must be demonstrated by
all MCA participants.
Further, after passing all the required hurdles, a country’s score will be
evaluated by the MCA Board of Directors who will make the final recommendations
to the President. The Board will be granted a degree of discretion in selecting the
final participants, taking into account such things as missing or old data, trends in
performance, and other information that might reflect on a country’s commitment to
economic growth and poverty reduction. Moreover, officials have yet to decide
whether to fund programs in all countries that qualify and pass the final review.

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CRS-10
Final selection, for example, could hinge on the quality of program proposals
submitted by the best performing nations, although other selection options are also
under discussion. Presumably, the President will also maintain flexibility as to
whether to agree with the Board’s recommendations.

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CRS-12
Issue: Association of performance indicators with economic
growth and poverty reduction. Analysts will be examining the set of 16
indicators to determine how well they predict successful development outcomes. An
initial assessment by the Center for Global Development suggests that many of the
indicators show a reasonable or strong relationship with economic growth, infant
mortality, and literacy rates, although a few show weak associations, especially in the
economic freedom category. According to the Center’s analysis, each of the six
governance indicators maintains good or strong correlation to development
outcomes. The measure of public primary education spending as a percent of GDP,
however, is weakly associated with the three development standards. Three of the
six economic freedom indicators – trade policy, days to start a business, and three-
year budget deficits – are also found in the study as being weakly correlated with
development achievements.14
Issue: Hurdles and median vs. aggregated ranking. Some may argue
that an aggregation of scores and top-to-bottom ranking rather than the use of hurdles
is a better way in which to determine eligibility with an above-the-median score
requirement. While the Administration holds that passing half the hurdles in each
of the three policy areas ensures broad commitment to both economic growth and
poverty reduction, it also means that countries do not have to meet each of the 16
standards to qualify. This approach departs from more traditional aid requirements
in which recipients must comply with all conditions associated with a program
framework, especially those of the World Bank, IMF, and in some cases U.S. aid
agreements. Once a country passes a hurdle, there are limited incentives to keep
improving in those areas. For countries that miss qualifying by a small margin,
however, the incentive remains.
Use of the median also in some cases complicates efforts for a country to pass
the hurdle due to outcomes beyond its control. The median will change over time,
sometimes because new
countries are added to the
pool, as will be the case in
Possible First-Year Qualifiers – One Analysis
FY2005. In other instances, a
country may improve on a
Albania
Georgia
Nepal
particular indicator but still
Bangladesh
Honduras
Senegal
not pass the hurdle because
Benin*
Losotho*
Sri Lanka
other countries improve more
Bolivia
Malawi
The Gambia
Mongolia
significantly and push the
median higher. Conversely, a
Source: Radelet, Qualifying for the Millennium Challenge
government could regress or
Account. See complete report for details on other countries,
remain stagnant over time but
future years, and why the results may vary somewhat with
pass a hurdle it had failed the
those of the Administration
* Likely to qualify when data becomes available.
previous year because the
median drops. A number of
14 Radelet, Qualifying for the Millennium Challenge Account. See especially Table 2,
Appendix, p. 2. This study also provides a useful critique of each of the 16 indicators
concerning data availability, reliability, and other relevant issues. Text available at
[http://www.cgdev.org/nv/Choosing_MCA_Countries.pdf].

---

CRS-13
observers have suggested that instead of using the median, it would be better either
to set specific, individual thresholds that would be relevant to each indicator or to use
absolute scores.15
A further issue in use of the median is that for three of the indicators – political
rights, civil liberties, and trade policy – the range is relatively narrow for scoring
country performance, resulting in many falling at the median. The Freedom House
assigns scores on a 1-7 scale, while the Heritage Foundation uses a scale of 1-5. For
the trade policy indicator, for example, 19 of the 74 IDA-eligible countries are
assigned the median score of 4. Since a country must place above the median to pass
a hurdle, this eliminates a number of candidates with limited differentiation of
performance.
Issue: Data accuracy and availability. Due to the difficulty in collecting
accurate data, especially those based on perceptions, a certain degree of error can be
expected in each of the 16 measurements. This cannot be overcome but is mitigated
to some extent by the requirement of only having to pass half the hurdles in each
policy area. But it appears most problematic for the pass/fail test of corruption.
According to an assessment made by the authors of the corruption index, there is a
large margin of error and high degree of uncertainty for 23 countries that score
slightly above or slightly below the median. Of these, 13 are below the median and
would therefore be eliminated from further consideration.16
Missing data also pose challenges, once again especially in the case of the
corruption pass/fail measure. A strict interpretation of the data would result in a
failing grade on a hurdle where no figures were available. It is anticipated that when
the World Bank publishes an updated corruption survey early next year, it will
include scores for each potential MCA participant so that a country will not be
excluded simply because of the lack of data. But significant gaps in coverage on
other measures may continue. Only 63 of the 115 possible MCA-eligible countries
have been reported with regard to the indicator “days to start a business”; reporting
on education and health spending as a percent of GDP is available currently for only
83 and 87 countries, respectively.
Issue: MCA Board of Directors discretionary authority. Allowing the
Board some latitude to depart from the purely statistical record will help address
some of the data accuracy and availability problems. Countries that just miss
qualifying, possibly because of the lack of data, could be reconsidered and approved.
In the case of “close-calls,” the Board could examine trends over time to assess if a
borderline country was improving or falling back in performance, and make
15 See, for example, Nancy Birdsall, Ruth Levine, Sarah Lucas, and Sonal Shah, On
Eligibility Criteria for the Millennium Challenge Account, Center for Global Development,
September 12, 2002, p. 5; and Radelet, Qualifying for the Millennium Challenge Account,
p. 25. As noted above, the Administration’s proposal sets a specific threshold for the
inflation indicator.
16 Radelet, Qualifying for the Millennium Challenge Account, p. 18. See also Daniel
Kaufmann and Aart Kraay, Governance Indicators, Aid Allocations, and the Millennium
Challenge Account, discussion draft of December 6, 2002.

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CRS-14
appropriate adjustments. In order to maintain the integrity and transparency of the
selection process, final judgments that deviate from the methodological base will
need to be clearly explained and closely examined. This will be especially important
in cases where the country with close strategic and political ties to the United States
is included despite not meeting all the hurdle tests. The same will be true should the
President decide to reject a country that has recently opposed or refused to support
an important U.S. security-related policy.
Implications for Other U.S. Assistance Programs
The MCA initiative will be an additional economic assistance tool of the United
States, and is not intended to replace or substitute for any existing channel of U.S.
foreign aid. It can be expected, therefore, that overall American aid will continue to
serve multiple national interests and foreign policy goals, including security,
humanitarian, multilateral, and commercial objectives. Administration officials have
made a commitment that the MCA will be in addition to existing aid activities and
that regular U.S. programs will continue even in MCA-participating countries.
Nevertheless, because of the priority being placed on the MCA policy orientation and
the size of the financial investment, there almost certainly will be ramifications of the
new initiative for current programs. Foremost may be funding tradeoffs, especially
given rising budget deficits and the costs of fighting the war on terrorism. (Spending
issues are also discussed below in the section on legislation and budgets.)
Issue: Commitment to global initiatives. During the past year, some
analysts have argued that a portion of the MCA should be dedicated to effective and
results-oriented global programs operated on a multilateral basis. One concern is that
the large amount of resources directed to the MCA may limit the U.S. ability to
maintain or expand upon commitments to such activities as the Global Fund to Fight
HIV/AIDS, Tuberculosis, and Malaria. Another worry is that soundly managed, high
impact programs in countries with weak governance and poor corruption standards
will miss out on the MCA opportunity to accelerate a process that is already making
a contribution to long-term economic growth and poverty reduction. Proponents of
this view advocate a “two-tiered” approach to the MCA in which separate pools –
and perhaps multiple pools – are maintained to serve several types of activities.17
The trade-off for this approach would be that significantly fewer resources per
country would be available, most likely reducing the impact of MCA assistance.
Some also caution that multilateral programs, regardless of their merits, do not
necessarily have the same results-oriented performance requirements of the MCA,
a fact that would undermine the main objective of the MCA. Increased resources are
only one important feature of the new initiative, and to many MCA advocates, the
most significant feature by far is the goal of allocating the aid where it will have the
greatest impact and be most readily accounted for.
Issue: Policy coherence and USAID program goals in MCA
countries. The Administration says it will maintain regular development aid
17 See, for example, Gene Sperling and Tom Hart, A Second Tier for the Millennium
Challenge Account, draft report, October 2, 2002.

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CRS-15
programs in a country while it simultaneously launches a far larger MCA-designed
activity. Executive officials have not said, however, how this might affect the shape
and goals of continuing programs managed by USAID missions. Some may argue
that regular aid objectives should be re-oriented to maintain policy consistency with
the MCA initiative and in some cases to help facilitate the core focus of the larger
pool of resources. Others, especially within USAID country missions, may question
whether successful projects should be abandoned, with a potential negative impact
on the target population. Some of these same issues regarding policy coherence are
likely to be raised by other foreign aid donors and institutions who are concerned that
the MCA may be creating additional, and perhaps competing performance goals to
those that already exist. How MCA program goals align with the Millennium
Development Goals is of particular concern.
Organizational Structures
One of the most contentious issues associated with the MCA policy review
process has been and is likely to continue to be where the MCA program
management will be placed. This debate has raised issues discussed for many years
concerning under what auspices U.S. foreign aid policy should be designed,
coordinated, and managed. Over the years, suggestions have ranged from
coordination within the National Security Council, creation of umbrella
organizations, like the ill-fated International Development Cooperation Agency, and
most recently the merger of such responsibilities into the State Department. After
extensive debate during the mid-1990s, a decision was reached to make USAID, the
principal U.S. government bilateral aid agency, totally independent, but to have it
operate under the guidance of the Secretary of State.
After considering numerous options, including the placement of the MCA as a
separate unit with the State Department, the Administration proposes to create a new
government entity – the Millennium Challenge Corporation – to manage the
initiative. Given the innovative and non-traditional approach inherent in the MCA
concept, executive officials say it makes sense to establish a new entity to oversee its
implementation. The Corporation will have a CEO, confirmed by the Senate, and a
staff of no more than 100 that will be drawn largely from other government agencies
and serve for limited-term appointments. A Board of Directors, chaired by the
Secretary of State, will oversee the MCC. Although it appears there is no precise
existing model in the U.S. government, officials say that the MCC will most closely
resemble the Overseas Private Investment Corporation, an organization that promotes
private American investment overseas, and the Commodity Credit Corporation, an
arm of the Department of Agriculture that manages export credit guarantee programs
for the commercial sale of American agricultural goods. An important difference
between these and the MCC, however, is the proposal to have a cabinet-member
Board oversee the latter and make final recommendations.
Issue: The need for a new organization. Before agreeing on the MCC,
the inter-agency steering committee reportedly looked seriously at the option of
creating a separate unit within the State Department to manage the MCA. One
reason for rejecting this proposal may have been the relative lack of experience of
State Department staff in administering aid programs. This was one of the central
issues considered when the question of whether to fold USAID into the Department

---

CRS-16
was under debate. This technical shortcoming, however, could have been overcome
by adopting the MCC principle of detailing aid experts from other agencies to staff
the office. A broader reason for not placing the MCA within the State Department,
however, may have been a concern that it would be located too close to the center of
the U.S. foreign policy apparatus that would limit the program’s immunity from
strategic and political influences. At a minimum, many observers believed, there
would be a perception problem – whether true or not – that the MCA did not truly
represent a departure from the past aid entanglements with broad U.S. foreign policy
interests.
At the same time, many groups encouraged the Administration to establish the
MCA as an office within USAID, but apart from the normal operations of the agency.
Various external groups argued that USAID, with its 40 years of development
experience, maintained the knowledge, staff, and on-the-ground country presence to
most effectively administer and monitor the MCA. To place responsibility
elsewhere, they contended, would risk duplication of effort, competing priorities, and
inconsistent policies.18
Others are skeptical, however, that USAID is best suited to implement the MCA
concept. The Agency is frequently criticized as encumbered with excessive
regulations, managed with poor financial systems and time-consuming planning
cycles, and burdened by extensive congressional oversight. One analysis, after
weighing both the merits and disadvantages of placing the MCA within USAID,
concluded that if the Administration wants the MCA to operate differently than
USAID, it should create a new agency to manage it.19
Issue: Role of MCC staff in managing and monitoring the MCA. One
of the first concerns of aid managers is the ability of a 100-staff organization to
maintain proper oversight and accountability standards over what will become a $5
billion program. By comparison, USAID maintains a staff of nearly 2,000 American
direct-hires and several thousand more contractors and foreign nationals based
overseas to implement a roughly $8 billion program. Few would argue that a similar
work-force is needed – indeed, there would likely be minimal support for a
bureaucracy even half that size. But with a central mandate of performance, results,
and accountability, the MCA requires a strong monitoring capability. The
Administration has mentioned the prospect of an outside, independent auditing
system, but the issue appears to remain unresolved.
Even though USAID will not manage the MCA, it is likely that its staff,
especially those located in MCA participant countries, will play a supporting role in
various capacities. USAID Administrator Andrew Natsios has told his staff that the
Agency’s long record of best practices and experience will be required if the MCC
is to be successful. But how this will operate in the field is an open question. There
is concern among some USAID professionals that the time and attention of mission
18 See, for example, the arguments of InterAction, raised in its May 2002 policy paper, The
Millennium Challenge Account: A New Vision for Development.
19 See Carol Lancaster, Where to Put the Millennium Challenge Account?, Center for
Global Development, October 15, 2002.

---

CRS-17
staff to support administrative, contracting, and procurement needs of MCA
programs will diminish their ability to manage regular aid programs. And as
mentioned above, how the current mission portfolio relates to MCA objectives is
unclear.
Issue: Future of USAID. The creation of a new agency to manage the MCA
is likely to be viewed by some as a vote of no confidence in USAID. This may
stimulate renewed debate over whether the USAID mandate should be modified –
perhaps limiting it to a strictly humanitarian aid agency – or folding it into the State
Department or the MCC itself at some future date. USAID supporters are concerned
that an MCA managed outside the principal U.S. development organization will
establish a two-class aid system with USAID responsible for addressing the needs of
the “weaker” performers while the main emphasis will transfer to the MCC. The
potential impact on staff recruitment and morale, and eventually resources, they
believe, could be serious. An argument could be made as well, however, that this
provides an opportunity for USAID not only to demonstrate its expertise as an aid
organization and serve the MCC as a valued “consultant,” but also can serve as
incentive to review its own operations and correct some of the persistent problems
identified by critics.
Program Development and Selection
With broad agreement that development programs work best when they are
designed and therefore “owned” by the host country and not imposed from outside,
executive officials stress that MCA programs will be country-driven. Once a nation
is identified as eligible, it will be invited to draft and submit program proposals for
evaluation and selection through the MCC. Projects should directly support broad
national development strategies already in place, preferably constructed with
extensive input from civil society. Since several of the possible MCA countries have
already designed such strategies as part of the Heavily Indebted Poor Country (HIPC)
debt reduction initiative – the so-called Poverty Reduction Strategy Papers – these
PRSPs might serve as the guiding framework for program goals where appropriate.
The Administration has outlined numerous types of programs that might be
supported by the MCA: budget support for various community, sector, or national
initiatives; infrastructure development, commodity financing, training and technical
assistance, and capitalization of enterprise funds or foundations. Selection would
depend on country-specific circumstances and would not be appropriate in all cases.
For example, budget support programs would only be suitable where governments
maintain transparent budgeting, accounting, and control systems and have strong
governance and anti-corruption records. Endowing enterprise funds or foundations
might be appropriate where other alternatives are weak or where innovative ways of
financing development proposals appear attractive.
An eligible country could submit multiple proposals annually, some of which
might take several years to implement. The MCC would create a contractual
relationship with selected countries and require the establishment of project
performance goals so that progress could be closely monitored. Should performance
fall behind or fail, the contract could be declared void and funding cut-off.

---

CRS-18
Issue: Detailing the types and targets of programs. One of the next
steps for the MCA inter-agency steering committee will be to refine more precisely
the nature of programs the MCA will support, who the beneficiaries will be, and what
criteria will be used in making the selection. A number of groups, especially in the
U.S. NGO community, have stressed the need to include programs that will directly
support non-governmental and civil society activities that may operate independently
of the government. Some advocate that the MCC solicit proposals directly from
private, non-governmental groups.
The Administration appears to be receptive to the principle that MCA funded
activities need not support only government-run or sponsored initiatives, but also
could include projects operated directly by the private sector or NGOs. What may
be more problematic is the receipt of proposals straight from these non-governmental
sources. This might result in an awkward competitive relationship between
government and non-government submissions, a competition that might be best
settled by the country itself prior to transferring recommendations to the MCC.
Another issue related to the types of programs eligible for MCA resources is the
capacity of both the U.S. and participant countries to manage the projects. Budget
support, infrastructure, and commodity assistance most likely would be large-scale
activities where substantial amounts of resources could be invested, thereby reducing
the total number of projects to be managed and monitored. Community-based or
NGO projects, on the other hand, likely would be much smaller in size and funding
requirements, but far more numerous in totality. While supporting the broadest array
of development programs with MCA funds provides the maximum opportunities,
U.S. policy makers will have to decide whether they are prepared to assume
responsibility for a large number of projects in the MCA portfolio and the associated
management, oversight, and accountability demands.
Legislative and Funding Matters
The Administration is drafting MCA authorizing legislation and making final
decisions over funding for FY2004, matters that should be submitted to Congress in
early February 2003. Although details of the legislation are not yet available,
program flexibility will be a key theme in whatever emerges. Executive officials say
that while the MCA should have its own statutory base separate from existing laws,
including the Foreign Assistance Act of 1961, current restrictions that prohibit U.S.
assistance to countries will remain. These include a lengthy list of potential
infractions including those related to human rights, drug production, terrorism,
nuclear weapons transfers and testing, military coups, debt payment arrears, and
trafficking in women and children, just to name a few.
On the funding question, the Administration has expressed a commitment to a
$5 billion MCA program by FY2006, although the pace at which resources approach
that figure in the first two years will be influenced by anticipated demand as well as
larger budgetary considerations stemming from competing spending priorities, a
growing deficit, and other possible policy initiatives. Whatever the outcome, the
Administration has made an additional commitment that MCA resources will not be
drawn from existing aid programs, but will be in addition to those appropriations,
although of course final decisions on appropriations will be made by Congress.

---

CRS-19
Issue: Flexibility and congressional directives and oversight. An
issue that has been heatedly argued between Congress and all Administrations for
many years has been the practice of congressional legislative directives and earmarks
in foreign aid authorization and spending laws. Executive officials argue that the
excessive use of such directives, both formal and informal, seriously erodes their
ability to manage foreign policy and operate a coherent foreign aid program. Most
in Congress view the use of directives and earmarks, however, as a legitimate tool
for congressional participation in setting foreign aid policy and spending priorities.
Some Members point to congressional emphasis in recent years on initiatives such
as child health, basic education, and international HIV/AIDS, programs that both the
Clinton and Bush Administrations subsequently came to embrace and support with
higher budget requests. Without congressional pressure through earmarks, U.S.
commitment and leadership on these policies would not exist to the extent they do
today, many argue.
The dispute over congressional foreign aid directives is unlikely to be resolved
during the MCA debate. However, the different nature of the MCA initiative will
provide the Administration with a different set of arguments against earmarks.
Because of the demand-based, results-driven nature of the MCA, executive officials
will contend that the traditional pattern of congressional directives – specifying
funding amounts for selected countries or activities, and placing restrictions on
certain operations – would undermine the basic principles of the MCA concept.
Legislative set-asides for a particular set of countries or for certain program activities
would arguably undercut the transparent, objective process of selecting the best-
performers.
In settling these differences, one model to examine might be how Congress
authorizes and funds other demand-driven programs in the annual Foreign Operations
appropriation bill. Since it is not known in advance who may request or require
support under programs such as the Export-Import Bank, the Trade and Development
Agency, or international disaster assistance, Congress generally appropriates amounts
that are expected to be needed to meet the resource demands placed on these
activities, with few or no set-asides for specific requirements. Authorizing laws for
these programs include some restrictions, but are generally not nearly as extensive
as those for regular bilateral economic and military aid programs. An important
difference, however, between such programs and the MCA is that their purpose is far
more narrowly defined than that of the MCA.

Linking existing foreign aid eligibility requirements with the MCA will likely
draw broad support within Congress, since many of those requirements reflect
fundamental social and political values and were congressionally initiated. But the
prospect of applying to an MCA participant these overarching aid prohibitions,
especially those that require an Administration discretionary determination to trigger
the aid cut-off, raises a new set of issues. Would, for example, the extent to which
the U.S. has a major financial investment in a successful MCA project influence a
decision on whether to declare the government in violation of narcotics cooperation
standards?
Issue: Funding and possible tradeoffs. When the FY2004 budget is
submitted in February, MCA advocates will be scrutinizing two funding issues: the

---

CRS-20
size of the MCA request and proposals for other U.S. economic aid programs. Many
believed that MCA resources should and would grow in equal amounts of $1.67
billion per year to reach the $5 billion total in three years. Conflicting
Administration statements gave credibility to the view that this was the intention,
although officials have said more recently that this is not the case. For one reason,
since the number of qualifiers the first year is still far from certain, the funding
requirements may be quite different from $1.67 billion.
In addition, the budget environment is much different than it was in March when
the President issued his policy statement. Budget deficits have risen, creating greater
pressure to hold spending down in nearly all areas. Moreover, congressional leaders
reportedly have agreed to adhere to the Administration’s overall discretionary budget
authority level for FY2003 – $750 billion – that will require the Senate and House
Appropriations Committees to revisit Foreign Operations program recommendations
made earlier; significant cuts are anticipated. Similar pressures are likely to continue
in the FY2004 debate, making the task of accommodating a new and large funding
initiative more difficult.
One way to manage MCA increases would be to rearrange overall foreign aid
spending priorities and reduce amounts elsewhere. But the President has said the
Administration will not take this path. Nevertheless, even if the FY2004 budget
request maintains funding for other foreign aid programs at existing levels,
congressional appropriators may be limited in their ability to fully provide for both
the MCA and other aid accounts. Unanticipated foreign policy contingencies could
arise later in the year, creating new resource demands. Congress may decide on
different appropriation priorities than the President and allocate a smaller amount to
the Foreign Operations funding bill. This would set the stage for direct trade-offs
between the MCA and competing security, economic, and humanitarian activities.
In addition, the MCA is not the only Foreign Operations program that may be vying
for increased spending next year. The U.S. has pledged additional resources for
“topping up” the HIPC initiative and funding IDA grants, and there will likely be
strong cases made by some Members to increase Afghan reconstruction efforts and
expand U.S. support for efforts to fight HIV/AIDS and other global infectious
diseases.

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CRS-21
Appendix A – U.S. Aid Compared to Other Major
Donors and the Impact of the MCA
For many years, the United States has been criticized by other nations and
international development organizations for not contributing enough to fight global
poverty and promote economic growth. Although the United States was the largest
provider of Official Development Assistance (ODA)20 until the early 1990s and was
second to Japan in most years since until 2001, its contribution has been at or near
the bottom of the list of international donors when measured as a proportion of
national wealth.
Figure 1. ODA Performance 2001
In 1972, the United Nations adopted a resolution calling on developed countries to
allocate 0.7% of GNP for foreign economic assistance. This target, which continues
to be cited by many nations and international organizations, was never endorsed by
the United States and has been achieved by only a few, mainly Nordic countries.
The United States defends its record as a development aid provider, arguing that
contributions to global poverty reduction should not be measured simply in terms of
20 ODA is a category used by the Organization for Economic Cooperation and Development
(OECD) to measure and compare the efforts of 22 member countries in supporting global
economic development. ODA includes all concessional and grant economic and food
assistance, excluding export promotion programs and military support. It also excludes
assistance to certain countries that are more economically advanced, such as Israel, Russia,
Ukraine, Poland, and Hungary. Consequently, ODA measures a large part, but not the total
amount of U.S. economic assistance. In FY2002, for example, the United States is
providing about $1.1 billion to nations that are not included in ODA figures. Moreover,
ODA is usually reported on a “net” basis – that is, aid disbursements minus loan
repayments. Because of these factors, ODA amounts for the United States are somewhat
smaller than actual economic aid appropriations annually approved by Congress.

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CRS-22
aid transfers as a percent of GNP.21 U.S. officials note that in dollar terms, American
ODA has remained substantial, and is programmed on more favorable terms than that
of other donors. The United States, they emphasize, was a leading voice over the
past several years in the Heavily Indebted Poor Country (HIPC) debt initiative, being
the first government to advocate 100% cancellation of bilateral debt owed by the
world’s poorest nations. American charitable organizations and businesses provide
a significant proportion of annual aid transfers and private investment to the
developing world. Given the large amount spent by the United States on defense and
the security it provides to allies and friends around the world, American contributions
to global stability and a stable environment in which economic development can take
shape is much larger than ODA expenditures suggest, they contend.
Table 2. Millennium Challenge Account Funding
One Possible Scenario of Economic Aid Increases
(billions of dollars)
Increase
ODA
Increase
Fiscal
ODA Levels
from FY2003
Levels
from FY2003
ODA as
Year
(current $s)
baseline
(constant
baseline
% of GDP
(nominal)
FY03 $s)
(real)
2000 actual
$11.174
–
$11.899
–
0.11%
2001 actual
$10.989
–
$11.449
–
0.11%
2002 estimate
$12.870
–
$13.153
–
0.12%
2003 request
$12.236
–
$12.236
–
0.11%
2004 projected
$13.903
13.62%
$13.612
11.25%
0.12%
2005 projected
$15.570
27.25%
$14.915
21.89%
0.13%
2006 projected
$17.236
40.86%
$16.136
31.87%
0.13%
Sources: OMB, Department of State, and CRS assumptions and calculations.
The scenario presented in this table assumes a $5 billion increase between FY2003 and FY2006, allocated in
equal amounts ($1.67 billion in each of FY2004-FY2006). Other assumptions would yield different results.
Exactly how the MCA will affect total U.S. ODA figures and comparisons with
other donors over the next three years is far from certain, but some projections can
be made. The illustration shown here assumes, for discussion purposes, that the
21 In recent years, the World Bank, the OECD, and other institutions have substituted the
term gross national income, or GNI, for GNP in order to conform to revised 1993 System
of National Accounts guidelines. The U.S. government in most cases uses the calculation
of gross domestic product, or GDP. GNI includes GDP plus net receipts of primary income
(compensation of employees and property income) from nonresident sources. For the
United States, GNI is slightly larger than GDP – in 2000, for example GNI was less than
one-tenth of one percent larger than GDP. The calculations in Table 2 and the ensuing
discussion are made based on OMB reported and projected U.S. GDP figures.

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CRS-23
MCA will grow to $5 billion by FY2006 in three equal installments, although as
noted above, this is unlikely. It further assumes other ODA will remain constant and
that the baseline from which to add this $5 billion commitment will be FY2003
enacted levels, which are also undecided.
Based on these working assumptions, a $5 billion dollar increase by FY2006
would result in a $17.2 billion foreign aid budget, as shown in Table 2. In real terms
(constant FY2003 dollars), taking into account the effects of inflation, U.S. economic
assistance in FY2006 would be $16.14 billion, the highest amount since FY1979 and
the signing of the Camp David Middle East peace accords and FY1985, an unusual
year in which the United States responded to special Middle East economic
stabilization and African famine requirements. But using FY2003 as a baseline
rather than FY2000, the percentage of increase, especially in real terms (counting
inflation), between FY2003 and FY2006 would be less than the 50% figure used by
some Administration officials. The nominal increase would be about 41% while in
real terms, FY2006 funding would be nearly 32% more. Because of the size of the
U.S. economy and continued growth projected over the next several years, the MCA
increases will have little impact on the amount of U.S. aid as a percent of GDP.
According to current projections, assistance would rise from the current 0.11% of
GDP to 0.13%.

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CRS-24
Appendix B – Potential MCA Participants:
Country Categories
IDA-eligible, per capita income $1,435 and below
MCA eligible FY2004 and beyond
Latin
Africa
Income*
East Asia/Pacific
Income*
America
Income*
Angola
$500
Burma
--
Bolivia
$940
Benin
$360
Cambodia
$270
Guyana
$840
Burkina Faso
$210
Indonesia
$680
Haiti
$480
Burundi
$100
Kiribati
$830
Honduras
$900
Cape Verde
$1,310
Laos
$310
Nicaragua
**
Cameroon
$570
Mongolia
$400
C.A.R.
$270
Papua New Guinea
$580
Chad
$200
Solomon Islands
$580
Comoros
$380
Timor-Leste
**
Congo, Dem Rep of
**
Vanuatu
$1,050
Congo, Rep of
$700
Vietnam
$410
Cote d’Ivoire
$630
Eritrea
$190
South Asia
Income*
Mid-East
Income*
Ethiopia
$100
Afghanistan
**
Djibouti
$890
Gambia
$330
Bangladesh
$370
Yemen
$460
Ghana
$290
Bhutan
$640
Guinea
$400
India
$460
Guinea-Bissau
$160
Nepal
$250
Kenya
$340
Pakistan
$420
Lesotho
$550
Sri Lanka
$830
Liberia
**
Madagascar
$260
Eurasia
Income*
Europe
Income*
Malawi
$170
Armenia
$560
Albania
$1,230
Mali
$210
Azerbaijan
$650
Bosnia
$1,270
Mauritania
$350
Georgia
$620
Yugoslavia
$1,000
Mozambique
$210
Kyrgyz Rep.
$280
Niger
$170
Moldova
$380
Nigeria
$290
Tajikistan
$170
Rwanda
$220
Uzbekistan
$550
Sao Tome&Principe
$280
Senegal
$480
Somalia
**
Sierra Leone
$140
Sudan
$330
Tanzania
$270
Togo
$270
Uganda
$280
Zambia
$320
Zimbabwe
$480
* Gross National Income, dollars per capita, 2001. World Bank Development Report, 2003.
** Precise data unavailable.

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CRS-25
Per capita income $1,435 and below
MCA eligible FY2005 and beyond
Africa
Income*
East Asia
Income*
Latin America
Income*
Equatorial Guinea
$700
China
$890
Ecuador
$1,240
Swaziland
$1,300
Philippines
$1,050
Paraguay
$1,300
Eurasia
Income*
Mid-East/N Africa
Income*
Belarus
$1,190
Morocco
$1,180
Kazakstan
$1,360
Syria
$1,000
Turkmenistan
$950
Ukraine
$720
Per capita income $1,436 - $2,975
MCA eligible FY2006 and beyond
Africa
Income*
East Asia/Pacific
Income*
Latin America
Income*
Namibia
$1,960
Fiji
$2,130
Belize
$2,910
South
$2,900
Marshall Islands
$2,190
Colombia
$1,910
Africa
Micronesia
$2,150
Dominican Rep.
$2,230
Samoa
$1,520
El Salvador
$2,050
Thailand
$1,970
Guatemala
$1,670
Tonga
$1,530
Jamaica
$2,720
Peru
$2,000
St.
$2,690
Vincent/Grenadines
Suriname
$1,690
South Asia
Income*
Mid East/N Africa
Income*
Maldives
$2,040
Algeria
$1,630
Egypt
$1,530
Iran
$1,750
Jordan
$1,750
Tunisia
$2,070
West Bank/Gaza
$1,610
Eurasia
Income*
Europe
Income*
Russia
$1,750
Bulgaria
$1,560
Macedonia, FRY
$1,690
Romania
$1,710
Turkey
$2,540
* Gross National Income, dollars per capita, 2001. World Bank Development Report, 2003.

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