Order Code RL31687
CRS Report for Congress
Received through the CRS Web
The Millennium Challenge Account:
Congressional Consideration of a
New Foreign Aid Initiative
Updated August 26, 2003
Larry Nowels
Specialist in Foreign Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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 $13.1 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” would 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 would be limited to countries with per capita incomes below
$2,975, although in the first two years — FY2004 and FY2005 — only countries below
the $1,435 level would compete for MCA resources. Participants would 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: 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 would be supervised by a
Board of Directors chaired by the Secretary of State. Several other key issues, including
the number of participating countries and monitoring mechanisms, have yet to be
determined.
Congress is playing a key role by considering authorization and funding legislation,
and in confirming the head of the proposed MCC. 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 the new MCC, and budget
considerations. Senate and House bills authorizing the MCA (S. 925, as amended on
July 10 to incorporate an amended S. 1160; and Division A of H.R. 1950, respectively)
create a new Corporation, but differ on the composition and powers of the Board of
Directors. Both bills further limit the amount of assistance than may be provided to
lower-middle income countries in FY2006 in order to place primary emphasis on the
poorest nations.
This report will be updated and expanded as Congress considers legislation
authorizing and funding the initiative.

Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Background of the Millennium Challenge Account Initiative . . . . . . . . . . . . . . . . 3
Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Outlines of the MCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
MCA features announced by the Administration . . . . . . . . . . . . . . . . . 5
MCA issues undecided within the Administration . . . . . . . . . . . . . . . . 6
The MCA and Congressional Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Country Eligibility and Income Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Issue: Income eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Congressional proposals to modify income eligibility . . . . . . . . . . . . . . 9
Performance Indicators and Selection Process . . . . . . . . . . . . . . . . . . . . . . 10
Congressional action on performance indicators . . . . . . . . . . . . . . . . . 11
Issue: Association of performance indicators with economic
growth and poverty reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Issue: Hurdles and median vs. aggregated ranking . . . . . . . . . . . . . . . 14
Issue: Surprising country outcomes and modifying the indicators . . . 15
Issue: Data accuracy and availability . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Issue: MCA Board of Directors discretionary authority . . . . . . . . . . . 16
Congressional proposals to modify Board of Directors discretion . . . 17
Implications for Other U.S. Assistance Programs . . . . . . . . . . . . . . . . . . . . 18
Issue: Commitment to global initiatives . . . . . . . . . . . . . . . . . . . . . . . 18
Issue: Policy coherence and USAID program goals in MCA
countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Organizational Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Issue: The need for a new organization . . . . . . . . . . . . . . . . . . . . . . . . 20
Congressional proposals to modify the organization structure . . . . . . 21
Issue: Role of MCC staff in managing and monitoring the MCA . . . . 22
Issue: Future of USAID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Congressional proposals to modify USAID’s role . . . . . . . . . . . . . . . . 23
Program Development and Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Issue: Detailing the types and targets of programs . . . . . . . . . . . . . . . 24
Congressional action on program issues . . . . . . . . . . . . . . . . . . . . . . . 25
Legislative and Funding Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Issue: Flexibility and congressional directives and oversight . . . . . . . 27
Congressional action on flexibility and oversight issues . . . . . . . . . . . 28
Issue: Funding and possible tradeoffs . . . . . . . . . . . . . . . . . . . . . . . . . 29
Congressional proposals to modify MCA funding levels . . . . . . . . . . 30
Appendix A — Comparison of Administration Proposal and Key
Congressional Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Appendix B — U.S. Aid Compared to Other Major Donors and the
Impact of the MCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Appendix C — Potential MCA Participants:
Country Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
List of Figures
Figure 1. ODA Performance 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
List of Tables
Table 1. MCA Performance Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 2. Millennium Challenge Account Funding . . . . . . . . . . . . . . . . . . . . . . . 34

The Millennium Challenge Account:
Congressional Consideration of a New
Foreign Aid Initiative
Most Recent Developments
The House has passed and the Senate is debating legislation establishing the
Millennium Challenge Account. On May 29, 2003, the Senate Foreign Relations
Committee reported S. 1160, legislation providing $1 billion for the MCA in
FY2004, $2.3 billion in FY2005, and $5 billion in FY2006. Subsequently, S. 1160
was modified and incorporated as Division C of S. 925, an omnibus foreign policy
authorization measure. The Senate debated but did not complete consideration of S.
925 on July 9 and 10, 2003. The modified text approves the creation of the
Millennium Challenge Corporation (MCC), as requested, but places the
Corporation’s Chief Executive Officer (CEO) under the direct authority and foreign
policy guidance of the Secretary of State. The Secretary would also chair the MCC’s
Board of Director, a panel which would expand from the Administration’s request
to include the USAID Administrator and the U.S. Trade Representative, and maintain
primary authority over key MCA decisions. In order to emphasize aid for the poorest
developing countries, the Senate measure further permits low-middle income nations
to participate in MCA programs in FY2006 and beyond only if MCA appropriations
exceed $5 billion.
On July 16, the House passed H.R. 1950, an omnibus foreign policy authorizing
bill that incorporates in Division A a slightly modified version of H.R. 2441 that had
been approved by the House International Relations Committee in June. The
legislation authorizes $1.3 billion for FY2004, as requested, $3 billion for FY2005,
and $5 billion for FY2006. Like the Senate bill, H.R. 1950 creates a new Millennium
Challenge Corporation and adds to the Board of Directors the USAID Administrator
and the U.S. Trade Representative, but includes four additional members to be
selected from lists provided by the congressional leadership. The House measure
also creates an Advisory Council and strengthens the authority of the MCC’s Chief
Executive Officer. It also limits assistance to low-middle income countries in
FY2006, capping the amount of aid to 20% of the total.
House and Senate Foreign Operations appropriation bills also were acted on in
July (H.R. 2800 and S. 1426) cutting resources for the MCA. The House-passed
measure provides $800 million while S. 1426, as reported, includes $1 billion.
Specific actions taken by Congress on the Administration’s proposed MCA
initiative are discussed throughout the report within the appropriate issue section.

CRS-2
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”
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

CRS-3
December, many issues have not yet been decided and remain under review by the
Executive branch.
Congress is playing 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
under the President’s plan. 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?
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

CRS-4
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, by one calculation 97 countries receiving $144
billion (constant dollars) in U.S. aid since 1980 had their median per capita gross
domestic product (GDP) decline from $1,076 to $994 by 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
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
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 Testimony of Brent Shaefer, The Heritage Foundation, before the House Foreign
Operations Appropriations Subcommittee, June 27, 2002. Foreign Operations, Export
Financing, and Related Programs Appropriations for 2003. Hearings, Part 3, p. 473.
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
(continued...)

CRS-5
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 writing legislation,
deciding on budget levels for FY2004, and consulting with Congress began. On
February 3, 2003, the President proposed $1.3 billion for the MCA in FY2004,
followed two days later by submission of a draft bill authorizing the initiative. The
requested legislation has been introduced as H.R. 1966 and S. 571. While several
important issues have been decided, others remain under discussion as the 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 have been
6 (...continued)
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].

CRS-6
incorporated into proposed authorizing legislation introduced on behalf of the
President 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.
! Types of programs supported. Administration officials say that
MCA programs will be available not only for government-sponsored
projects, but for activities proposed and implemented by local
governments and communities, civil society, and the private sector.
National governments, however, would remain responsible for the
program and be the party to sign a contract between the U.S. and the
country. Moreover, according to Administration officials, all types
of assistance — budget support for government initiatives,
infrastructure projects, and more targeted activities focused on
specific sectors — are available for consideration.
! 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 include the
Treasury Secretary and the OMB Director.
! FY2004 funding. The Administration has proposed $1.3 billion for
the MCA’s first year and continues to support its pledge of $5 billion
by FY2006. The budget, however, does not specify what the likely
request for FY2005 will be.
MCA issues undecided within the Administration. Beyond some of
these key decisions, other matters remain under discussion.

CRS-7
! 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
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.
! 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
examined. These will include matters that have already been decided within the
executive branch, as well as issues that remain under discussion.

CRS-8
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 13 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 — 28 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. Some have also noted that the 28 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. It may further tend to blur the
distinction between MCA goals and objectives of other aid programs, jeopardizing
the unique approach of the MCA and the need for programmatic flexibility.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.
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 Three 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; Catholic Relief Services,
Improving Effectiveness: Recommendations for the Millennium Challenge Account, June
24, 2002; and Bread for the World, Rise to the Challenge: End World Hunger, available at
[http://www.bread.org/issues/rise_to_the_challenge/preview.html].
10 See: Lael Brainard, Compassionate Conservatism Confronts Global Poverty, the
Washington Quarterly, Spring 2003, p. 151; and Steve Radelet, Qualifying for the
Millennium Challenge Account,
Center for Global Development, December 13, 2002, p. 4.

CRS-9
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.
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
28 higher-income countries become eligible, they will be evaluated separately from
the other 87, 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.
Congressional proposals to modify income eligibility. Reflecting the
perspective that the MCA should remain focused on the poorest countries, the Senate
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.

CRS-10
Foreign Relations Committee recommends in S. 1160 (as added to S. 950) to permit
participation by low-middle income country in FY2006 and beyond only if MCA
funding exceeds $5 billion. If not, MCA programs may only be supported in
countries that fall below the “historical per capita income cutoff of the International
Development Association,” a level that is currently $1,435. Even in years when the
MCA appropriation exceeds $5 billion, the Senate bill would limit funding to low-
middle income participants to 20% of the total amount. The Foreign Relations
Committee further expresses its intention that MCA programs in the low-middle
income countries should focus on poor communities in those nations.
The House International Relations Committee, in H.R. 1950, also limits to 20%
the amount of MCA resources that can be allocated in FY2006 to low-middle income
participants. But unlike the Senate, the House measure does not require an
appropriation in excess of $5 billion for inclusion of the low-income group in
FY2006. The Committee considered two amendments during markup related to the
income issue. The first, offered by Congressman Payne and approved by the House
panel, would require low-middle income countries that are selected for MCA grants
to make a contribution from their own resources to whatever MCA programs are
funded. The second amendment, proposed by Congressman Menendez, originated
out of concern that few (7) Latin American nations would be eligible to compete for
MCA resources in the first two years, despite large pockets of poverty in these
countries. The Menendez amendment, which was defeated (10-24), would have
made low-middle income nations, a group which includes nine from Latin America
eligible from the beginning. Similarly, Congressman Kolbe proposed an amendment
during House floor debate that would have allowed low-income countries to be
eligible beginning in FY2005 rather than FY2006. The Kolbe amendment failed
110-313. While sympathetic to the concerns expressed by sponsors of the
amendment, those opposed to changing the income eligibility structure argued that
resources diverted from Latin America and many other nations would come at the
expense of the world’s poorest nations where the needs are greatest.
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,
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

CRS-11
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 MCC 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.
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.
Congressional action on performance indicators. Measures considered
in the Senate and House (S. 1160, as amended and incorporated into S. 925; and H.R.
2441, as amended and incorporated into H.R. 1950) do not directly legislate the list
of performance indicators to be used, thereby allowing the executive branch to apply
the measures that it has recommended. Both, however, provide for advance
congressional consultation and public awareness. S. 925 requires that the list of
proposed indicators be published in the Federal Register and on the Internet and that
the Administration consider public comment prior to issuing the final determination
of the indicators. In this way, the Committee believes that the indicators can be
refined and improved. H.R. 1950 requires the Corporation’s CEO to consult with

CRS-12
congressional committees prior to establishing eligibility criteria and methodology
and publish such criteria once finalized. Both bills further direct that country
eligibility will be based on an evaluation of performance criteria that closely match
the 16 indicators listed in Table 1 below. In its report on S. 1160, the Senate Foreign
Relations Committee expresses its intent that the selection be based on development
needs and performance, and not on immediate political considerations.

CRS-13
Table 1. MCA Performance Indicators
Ruling Justly
Investing in People
Economic Freedom
Control of Corruption
Public Primary Education Spending as % of GDP
Country Credit Rating
Source: World Bank Institute
Sources: World Bank and national sources
Source: Institutional Investor Magazine, September
http://www.worldbank.org/wbi/governance/pubs/g
2002.
ovmatters3.html
Voice and Accountability
Primary Education Completion Rate
Inflation (must be below 20%)
Source: World Bank Institute
Sources: World Bank and national sources
Source: IMF
http://www.worldbank.org/wbi/governance/pubs/g
ovmatters3.html
Government Effectiveness
Public Expenditure on Health as % of GDP
Three-year Budget Deficit
Source: World Bank Institute
Sources: World Bank and national sources
Source: IMF and national sources
http://www.worldbank.org/wbi/governance/pubs/g
ovmatters3.html
Rule of Law
Immunization Rates: DPT and Measles
Trade Policy
Source: World Bank Institute
Sources: World Bank, U.N., governments
Source: The Heritage Foundation, Index of
http://www.worldbank.org/wbi/governance/pubs/g
Economic Freedom
ovmatters3.html
http://www.heritage.org/research/features/index/
Civil Liberties
Regulatory Policy
Source: Freedom House
Source: World Bank Institute
http://www.freedomhouse.org/research/freeworld/2
http://www.worldbank.org/wbi/governance/pubs/g
002/tableindcountries.pdf
ovmatters2001.htm
Political Freedom
Days to Start a Business
Source: Freedom House
Source: World Bank
http://www.freedomhouse.org/research/freeworld/2
http://rru.worldbank.org/DoingBusiness/SnapshotR
002/tableindcountries.pdf
eports/EntryRegulations.aspx

CRS-14
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 FY2005. In other instances,
Possible First-Year Qualifiers — One
a country may improve on a
Analysis
particular indicator but still not pass
the hurdle because other countries
Armenia
Honduras
Senegal
improve more significantly and
Bhutan
Lesotho
Sri Lanka
p u s h t h e m e d i a n h i gh e r .
Bolivia
Mongolia
Vietnam
Conversely, a government could
Ghana
Nicaragua
regress or remain stagnant over time
Source: Steve Radelet, “Which Countries Are Most
but pass a hurdle it had failed the
Likely to Qualify for the MCA? An Update.”
previous year because the median
Center for Global Development. May 30, 2003.
drops. A number of observers have
Available at: [http://www.cgdev.org/pubs
suggested that instead of using the
/challenging_aid/country%20qualification%20upd
ate1.pdf]
median, it would be better either to
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-15
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: Surprising country outcomes and modifying the indicators.
Many have been surprised by the possibility that countries such as Vietnam and
China might qualify, despite scoring near the bottom on half of the indicators for
ruling justly. Both countries pass the hurdles for corruption, rule of law, and
government effectiveness, but have some of the worst scores in the categories of
political rights, civil liberties, and voice and accountability. Since they score above
the median for three of the six indicators and pass the corruption measure, they would
qualify, at least in the ruling justly category.
One analyst attributes this to the high degree of correlation among several
indicators in a single category that tends to magnify existing data deficiencies. When
half the indicators in a single category are strongly related to one another, and a
country scores well in those areas, the other indicators essentially become irrelevant.
Egypt is also cited as an example of a country with a poor record on regulation and
trade, but would have passed the economic freedom grouping with data available in
early 2003 based on the strength of macroeconomic indicators.16
One modification to the current proposal that would address this potential
weakness would be to make sure that highly correlated indicators represent less than
one-half the total cluster. In this way, a country would not pass one of the three
categories based on a strong showing in one respect but very poor standards for the
other measures. Another alteration to the Administration’s plan would be to add an
additional indicator in each category so that there would be an odd number of
measurements in each category. In a sense, the added element would become a “tie-
breaker” in cases where the current indicators tended to cluster in two, evenly
divided, highly correlated groupings. One review of the MCA proposal argues that
the initiative does not include sufficient attention to democracy issues because it
includes indicators in the ruling justly category that are better measures of economic,
not political freedoms. This analysis recommends a shift of the corruption, rule of
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 Brainard, Compassionate Conservatism Confronts Global Poverty, p. 158. According to
more recent data, Egypt would not qualify in FY2006.

CRS-16
law, and government effectiveness indicators to the economic policy category. Under
this scenario, countries like Vietnam and China would fail the ruling justly test.17
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 25 countries that score
slightly above or slightly below the median. Either cross-country data are not
informative or sources disagree on a country’s corruption standing. Of the total of
25, 13 fall below the median and would therefore be eliminated from further
consideration, despite strong doubt as to whether the data measured performance
accurately. To overcome this potential weakness, the authors recommend that MCA
managers employ in-depth country diagnostics regarding governance performance
for countries that fall near the medium — the “yellow light countries.”18
Missing data also pose challenges. A strict interpretation of the data would
result in a failing grade on a hurdle where no figures were available. 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. But there appears to be divided
opinion over how much discretion should be permitted.
Arguing for broader flexibility, some note that countries that just miss
qualifying, possibly because of the lack of data, could still be reconsidered and
approved.19 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 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.20 This will be especially
17 Thomas Palley, The Millennium Challenge Accounts: Elevating the Significance of
Democracy as a Qualifying Criterion.
Open Society Institute, January 2003.
18 Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi, Governance Matters III:
Governance Indicators for 1996-2002
, discussion draft, June 30, 2003. Available at
[http://www.worldbank.org/wbi/governance/pdf/govmatters3.pdf].
19 Daniel Kaufmann and Aart Kraay, Governance Indicators, Aid Allocations, and the
Millennium Challenge Account
, discussion draft of December 6, 2002.
20 One observer acknowledges that some discretionary authority is needed, but adds when
the Board issues a waiver and deviates from the performance indicator outcome, it should
be required to publically issue a policy justification and rationale for making the exception.
See, Palley, The Millennium Challenge Accounts: Elevating the Significance of Democracy
(continued...)

CRS-17
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. Others disagree,
however, contending that any discretion on the part of the Board would invite
unwarranted political influence and undermine MCA effectiveness.21 Another
analyst argues that one way to avoid undue foreign policy intrusion would be to
channel MCA funds through multilateral entities, such as the World Bank.22
Congressional proposals to modify Board of Directors discretion.
As noted below, the Senate Foreign Relations Committee initially reported an MCA
authorization bill that did not authorize the creation of a Millennium Challenge
Corporation, with a Board overseeing its operations. Instead, S. 1160 placed the
MCA within the State Department under the authority of the Secretary of State and
giving the Secretary the power to determine eligible countries through the evaluation
of a government’s commitment to several factors in the three areas of ruling justly,
economic freedom, and investing in people.
Subsequently, however, the Senate voted on July 9 to modify the MCC structure
and the role of the Board of Directors by adopting revised text that is largely based
on a proposal offered by Senator Lugar (S. 1240). The modified arrangement, which
has been incorporated as Division C of S. 925, establishes a Corporation to be
managed by a CEO. Under the Senate measure, the CEO would report to and be
under the direct authority and foreign policy guidance of the Secretary of State. S.
925, as amended, further establishes a Board of Directors, chaired by the Secretary
of State, and grants the Board the power to determine eligible countries by evaluating
the commitment of a country to democratic governance, economic freedom, and
investments in people. This does not, however, appear to limit the Board’s
selections based solely on the results of the performance indicators. In this way, the
Senate measure seems to permit a similar degree of discretion that the
Administration’s plan envisions.
The House-passed measure (H.R. 1950) is similar to the Senate bill in that it
requires eligible countries to have demonstrated a commitment to bolstering
democracy, investing in health and education, and promoting sound economic
policies, but does not specifically identify how such a commitment shall be
determined, other than through the creation of eligibility criteria and a methodology.
Where the bills diverge, however, regards who makes the determination of eligibility
and therefore, who would be in position to exercise discretion in deviating from a
strictly statistical evaluation. S. 925, as amended on July 9, gives the Board of
20 (...continued)
as a Qualifying Criterion, p. 14.
21 Brent D. Schaefer and Paolo Pasicolan, How to Improve the Bush Administration’s
Millennium Challenge Account.
Heritage Foundation Backgrounder no. 1629, February 28,
2003.
22 Nicolas van de Walle, A Comment on the MCA Proposals, Center for Global
Development, January 9, 2003. Available at http://www.cgdev.org/nv/features_MCA.html

CRS-18
Directors authority to determine whether a country is eligible, while H.R. 1950 places
the power with the Corporation’s CEO.
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.23
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
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
23 See, for example, Gene Sperling and Tom Hart, A Better Way to Fight global Poverty
Broaending the Millennium Challenge Account, Foreign Affairs, March/April 2003, p. 9.

CRS-19
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. In perhaps the clearest statement to date, USAID
Administrator Natsios told the House Foreign Operations Appropriations
Subcommittee that actions may vary from country to country. He noted that USAID
missions in MCA-selected countries would likely undertake a strategic review of
their programs and may adjust projects to support the MCA contract. In other cases,
however, missions might continue high-priority activities, such as those combating
HIV/AIDS or curbing trafficking in persons, or terminate certain activities.24
Some of these same issues regarding policy coherence are being raised regarding
the relationship between the MCA and other U.S. economic and trade tools aimed at
promoting economic growth in developing nations. One study, for example,
concludes that there is very little overlap between countries likely to qualify for the
MCA and those currently eligible for debt reduction under the Heavily Indebted Poor
Country (HIPC) initiative or for trade preferences under the African Growth and
Opportunity Act.25 Congressman Jim Kolbe, Chairman of the House Foreign
Operations Subcommittee, the House panel with jurisdiction over funding the MCA,
suggests that MCA qualifiers should get special consideration for expedited trade
preferences that would further accelerate economic growth possibilities.26 Still others
who support the MCA framework find fault with the Administration for not devising
simultaneously an overall foreign aid strategy into which the MCA fills one of
several elements of a comprehensive policy.27
Beyond U.S. programs and policies, other foreign aid donors and institutions are
expressing concerns 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
24 Statement by Andrew Natsios, Administrator USAID, before the House Foreign
Operations Appropriations Subcommittee, May 21, 2003.
25 Brainard, Compassionate Conservatism Confronts Global Poverty, p. 160.
26 Jim Kolbe, Lessons and New Directions for Foreign Assistance, The Washington
Quarterly, Spring 2003, p. 197.
27 Steve Radelet, Will the Millennium Challenge Account be Different? The Washington
Quarterly, Spring 2003, p. 184.

CRS-20
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 and include the Treasury Secretary and OMB Director, 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
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 have 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 contend, would risk duplication of effort, competing priorities, and
inconsistent policies.28 Another, business-related organization also opposes the
creation of a new institution. Rather it recommends the establishment of a “small
core office” (unspecified as to where it would be placed) that would identify program
28 See, for example, the arguments of InterAction, raised in its May 2002 policy paper, The
Millennium Challenge Account: A New Vision for Development.


CRS-21
priorities and distribute the MCA funds to USAID and the Trade and Development
Agency (TDA).29
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.30
Congressional proposals to modify the organization structure.
Proposals considered by the Senate have shifted positions on the organizational issue
as bills have moved through the legislative process this year. S. 1160, as reported by
the Foreign Relations Committee in May, did not authorize the creation of the MCC,
as proposed by the President. Instead, the legislation designated the Secretary of
State as the coordinator of MCA assistance and directed the Secretary to designate
a coordinator within the State Department for managing the program. The
coordinator, who would be confirmed by the Senate, would have authority to develop
the list of performance indicators, select eligible countries, and to coordinate MCA
programs with other donors.
The Committee adopted this approach by approving an amendment offered by
Senators Hagel and Biden (approved 11-8). The sponsors noted that in 1998
Congress had consolidated two independent agencies — USIA and ACDA — in the
State Department in order to give the Secretary more director authority over all tools
of U.S. foreign policy. To create a separate entity to manage what could become the
cornerstone of American foreign assistance, they argued, would run counter to these
recent efforts to better integrate and coordinate foreign policy decision-making.
Supporters further questioned what value the OMB Director would provide by being
on the Board of Directors, given that the Director is generally not assigned policy-
making responsibilities.
The Administration strongly opposed the Committee’s action to place the MCA
in the State Department. At the markup session on May 21, Chairman Lugar read a
letter from Secretary Powell underscoring the value of a new, independent, and
creative entity for managing this “new start” to U.S. foreign aid. The Secretary said
that if this approach remains in the final bill, he would recommend that the President
veto the legislation.
Senator Lugar, who opposed the Biden-Hagel amendment, proposed an
alternative structure in new legislation. S. 1240, as introduced on June 11, would
create a Millennium Challenge Corporation, headed by a CEO who would report to
29 Business Recommendations for Administering the Millennium Challenge Account.
Business Council for Int er nat i onal Under st andi ng. Available at
[http://www.bciu.org/MCA.pdf].
30 See Carol Lancaster, Where to Put the Millennium Challenge Account?, Center for
Global Development, October 15, 2002.

CRS-22
the Secretary of State. Senator Lugar intended that such an arrangement would
provide the Corporation with the same degree of independence and status as USAID,
but establish a chain of command that would permit the Secretary of State to exercise
broad authority over the MCA. S. 1240 created a Board of Directors, made up of the
Secretary of State (Chairman), the Secretary of the Treasury, the USAID
Administrator, the U.S. Trade Representative, and the MCC CEO. The full Senate
adopted the general approach proposed by Senator Lugar when it voted on July 9 to
incorporate a modified text of MCA authorizing legislation into S. 925, an omnibus
foreign policy authorization bill. The approved text further strengthens the explicit
relationship between the Corporation and the Secretary of State by adding that the
CEO shall “report to and be under the direct authority and foreign policy guidance
of the Secretary.” The Administration has not expressed objection to the revised
legislation.
The House bill, H.R. 1950, takes a somewhat different approach than the
modified Senate proposal that is closer to the Administration’s position, although
with some important differences. H.R. 1950 would create a new Millennium
Challenge Corporation sought by the President, but alters the composition of the
Board of Directors and, as noted above, the authority of the MCC’s Chief Executive
Officer. The Board would include the Secretary of State as Chairman and the
Secretary of the Treasury, as proposed, but deletes the Director of OMB and adds the
USAID Administrator, the U.S. Trade Representative, and the CEO of the MCC.
The bill also includes four additional members, to be appointed by the President from
a list submitted by the majority and minority leaders of the House and Senate. The
Board would further include as non-voting ex-officio members the CEO of OPIC,
and the Directors of the Trade and Development Agency, Peace Corps, and OMB.
The House measure further creates an Advisory Council that would advise, consult,
and make recommendations to the CEO and Board of Directors for improving the
MCA. The Council would include seven CEO-appointed members from the non-
governmental sector, including business, labor, private and voluntary organizations,
foundations, public policy organizations, and the academic community.
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

CRS-23
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.31
Congressional proposals to modify USAID’s role. Both Senate and
House bills appear to attempt to clarify the relationship between the MCC and
USAID in efforts to minimize overlap and inconsistency of aid policies and
operations. As mentioned above, under both bills the USAID Administrator would
become a voting member of the Board of Directors. S. 925, as amended, further
directs Corporation staff posted overseas to coordinate the MCA program with the
USAID mission director in that country. The legislation also directs USAID to
ensure that agency programs will help prepare potential MCA participant countries
to become eligible for assistance.
Similarly, H.R. 1950 gives USAID the lead role in assisting countries to become
eligible in the future that have demonstrated a commitment to development but fail
to qualify based on the performance indicators (the so-called “near-miss” countries).
Up to 15% of the amount authorized annually for the MCA may be made available
for such USAID programs. (The Senate measure also provides up to 10% of annual
MCA funds be available to countries that fail to qualify because of unreliable data
or lack of performance on only one indicator, although the Corporation, not USAID
would provide the assistance.) H.R. 1950 also directs the MCC to consult with
USAID officials regarding the contents of a contract — or Compact — between the
U.S. and an MCA participant country, and requires that the MCC and USAID
coordinate their programs to the maximum extent possible. During House floor
debate, Members adopted an amendment by Congressman Kolbe intended to further
31 One analyst also notes a certain irony to locating the MCA outside of USAID and leaving
the agency with just three core missions: humanitarian, immediate post-conflict, and basic
health and education programs in poor performing nations. This would place USAID
programs much closer to broad U.S. foreign and strategic policy interests than the MCA.
Yet, the State Department, by virtue of the Secretary being the MCC Board Chairman,
would have greater influence over the MCA than the independent USAID. See Brainard,
Compassionate Conservatism Confronts Global Poverty, p. 165.

CRS-24
clarify USAID’s role in providing U.S. economic assistance. The language states that
the USAID Administrator shall report to the President “through, and operate under
the foreign policy authority and direction of the Secretary of State.”32 The Kolbe
amendment also authorizes USAID to extend assistance to countries ineligible for
MCA aid so that they may become eligible, and permits USAID to help in the
evaluation, execution, and oversight of the MCA projects.
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.
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
32 This is similar to current law (Sec. 1522 of P.L. 105-277) which states that the USAID
Administrator shall “report to and be under the direct authority and foreign policy guidance
of the Secretary of State.”

CRS-25
of the government. Some advocate that the MCC solicit proposals directly from
private, non-governmental groups.33
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. The draft
legislation submitted to Congress in February 2003 allows the MCC to issue grants
to both private and public entities. 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. USAID Administrator Natsios told the
House Appropriations Foreign Operations Subcommittee on May 21 that while the
MCA would likely include programs proposed by non-governmental entities, the
contract would need to be signed by the host government and that the government
would be responsible for managing and overseeing the project.
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.
A key principal endorsed by numerous MCA proponents is that programs must
be country-owned, designed by a broad spectrum of government and civil society.
As noted above, some have suggested that PRSPs that have been developed by many
potential MCA countries could be used as the guiding framework in devising
program proposals.34 Recognizing, however, that many MCA countries do not have
sufficient capacity to design program proposals on their own, many suggest that
USAID and others assist — but do not control — the development of program
submissions.35
Congressional action on program issues. Both Senate and House bills
would permit MCA resources to be provided to a wide range of entities, including
central governments, NGOs, local communities, and private sector groups. The
Senate Foreign Relations Committee expressed its intention that in this way, MCA
33 See, for example, Palley, The Millennium Challenge Accounts: Elevating the Significance
of Democracy as a Qualifying Criterion,
p. 13.
34 See, for example, Millennium Challenge Account: A Proposed Conceptual Approach for
Eligibility.
U.S. Conference of Catholic Bishops, August 13, 2002. Available at
http://www.usccb.org/sdwp/international/mca.htm
35 Brainard, Compassionate Conservatism Confronts Global Poverty, p. 161.

CRS-26
programs would broaden local capacity and extend the widest possible participation
in achieving the MCA development goals. H.R. 1950 would further permit
international organizations and trust funds to receive MCA funds, something that the
Administration’s proposal does not appear to include.
Legislative and Funding Matters
The Administration submitted in early February 2003 draft MCA authorizing
legislation and separately proposed $1.3 billion for the first year funding level.
Program flexibility, as expected, is one of the key themes integrated throughout the
draft bill. 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.
In keeping with the desire for flexibility the draft legislation would make
available MCA resources “notwithstanding any provision of law,” but with a notable
exception. Countries that currently cannot qualify for U.S. assistance under part 1
of the Foreign Assistance Act of 1961 — that part of the Act authorizing programs
for bilateral development aid, narcotics control, international disasters, the former
Soviet Union, and Central Asia, among others — would remain ineligible for MCA
funds. However, if the President waives any prohibition under Part 1 for a particular
country, that nation would then be eligible for MCA resources.36
Another area of flexibility highlighted in the draft bill concerns personnel and
administrative authorities. The CEO of the Corporation would be granted authority
to establish and modify in the future a human resources management system without
regard to existing laws governing Civil Service and Foreign Service activities,
although certain provisions, including merit and fitness principles, cannot be waived.
The draft submission further grants the CEO the authority to appoint and terminate
personnel notwithstanding Civil Service and Foreign Service laws and regulations.
The bill would also allow the MCC to transfer MCA resources to any U.S. agency,
and would permit the Corporation to draw on the services and facilities of other
federal agencies in carrying out the program.
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 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. For FY2004, the President requests $1.3 billion, a
figure less than one-third of the three year goal that some had expected. The
Administration does not provide any projections for FY2005.
36 For example, the President may waive human rights restrictions for Part 1 programs if he
determines that the aid will benefit the needy people of the country (section 116). Likewise,
the President make exempt application of aid cutoffs, based on national interest
requirements, for countries that do not cooperate on narcotics control matters.

CRS-27
The President further made a commitment that MCA resources would not be
drawn from existing aid programs, but would be in addition to those appropriations,
although of course final decisions on appropriations will be made by Congress. The
Administration seeks a large — $2.6 billion, or 16% — increase in Foreign
Operations Appropriations programs for FY2004, including the MCA funds, but
some areas of the proposal, especially for bilateral development assistance programs,
fall below current amounts for FY2003.
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. Moreover, some contend that these broad,
sector allocation directives represent priority-setting decisions by lawmakers and
reflect the appropriate and constructive power of Congress to manage the federal
“purse.” It is the far more targeted earmarks, they contend, benefitting special
interests or specific organizations and firms, that are problematic from the
Executive’s perspective.
The dispute over congressional foreign aid directives is unlikely to be resolved
during the MCA debate. However, the distinctive nature of the MCA initiative will
provide the Administration with a different set of arguments against earmarks.
Because of the demand-based, results-driven concept 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

CRS-28
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?
Congressional action on flexibility and oversight issues. For the
most part, S. 925, as amended, appears to refrain from earmarking, provides
authorities consistent with MCA principals set out by the Administration, and
permits the executive to implement the program with a degree of flexibility. Perhaps
most importantly, the Senate bill authorizes assistance “notwithstanding any other
provision of law,” meaning that existing aid prohibitions would not necessarily apply
if the Secretary of State so determined. The legislation, however, specifies that
assistance may not result in the loss of American jobs, displace U.S. production, pose
a major environmental, health, or safety hazard, or be used for military support. The
Senate measure also adds several requirements aimed at strengthening congressional
oversight of the MCA. The legislation requires the Secretary of State to post
information about the MCA in the Federal Register and on the Internet, and to submit
an annual report on MCA operations. The Senate Committee noted that it was
particularly interested in how traditional economic aid programs and the MCA
related to one another.
The House-passed legislation extends substantial flexibility to the
Administration in managing the MCA. H.R. 1950, however, does not afford the
President the degree of freedom requested in waiving existing foreign aid restrictions
that apply to non-MCA assistance programs. The White House draft bill states that
if a country fell under a restriction that blocked regular U.S. economic aid, the
government would not be eligible for MCA consideration, unless the President had
issued a waiver exempting the application of such aid prohibition.37 H.R. 1950,
however, would not recognize a Presidential waiver to an underlying aid restriction
regarding human rights, international narcotics control, or terrorism, for purposes of
making a country eligible for the MCA. For example, under section 490 of the
Foreign Assistance Act of 1961, the President must annually certify for each major
illicit drug producing or transit nation that it is cooperating with U.S. efforts to stem
the production or movement of illegal narcotics. For national security reasons, the
37 Examples of such aid prohibitions include those applying to governments that violate
human rights, do not cooperate in counternarcotics efforts, harbor terrorists, test nuclear
devices, do not pay debts owed to the United States, or which came to power through a
military coup.

CRS-29
President may waive this provision in order to continue providing U.S. assistance.38
Under the terms of H.R. 1950, a country for which a waiver had been issued under
section 490 and was eligible for regular U.S. aid, would not be allowed to compete
for MCA assistance. This would have the potential effect of not only limiting the
number of MCA eligible nations, but might also influence executive thinking on
whether to declare a country in violation of section 490 (or other restrictive
provisions) if a secondary result would be to make the nation ineligible for MCA
consideration even with a waiver.
Issue: Funding and possible tradeoffs. Following submission of the
FY2004 budget, MCA advocates have been scrutinizing two funding issues: the 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. Such pressures are likely to
continue throughout 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 said the
Administration would not take that path. While the FY2004 budget request largely
maintains funding for other foreign aid programs at existing levels — although with
a few important exceptions, congressional appropriators may be limited in their
ability to fully provide for both the MCA and other aid accounts. The effects of a
war in Iraq and 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 is vying for
increased spending next year. The President’s budget includes several other new
initiatives, including those for additional HIV/AIDS resources, “topping up” the
HIPC debt reduction initiative, a contingency funds addressing famine and conflict
needs. While the overall request for Foreign Operations is well above FY2003
enacted levels — up 16% — these new initiatives account for most of the increase,
leaving continuing programs with a more modest 3.6% rise.
38 For FY2003, the President determined that Haiti and Guatemala were not adequately
cooperating with U.S. counternarcotics efforts, but for national security reasons, he would
waive the aid prohibition for these two countries.

CRS-30
Some foreign aid proponents have been especially concerned about reductions
in the President’s FY2004 budget for development assistance and global health
programs. Compared with the Administration’s request for FY2003, the FY2004
budget blueprint is the same — a combined $2.96 billion total for these “core”
bilateral development aid activities. But due to Congressional additions, the FY2003
levels have been raised to $3.23 billion, making the FY2004 request 8% less than
enacted amounts for this year. Some are arguing that this, and similar reductions
below FY2003 appropriations for refugees, disaster, and food aid, break the
President’s pledge to make the MCA an additional source of funding. In order to
reach a conclusion, however, one would have to know whether funds proposed for
the MCA would be made available for accounts supporting similar activities if this
new initiative was not submitted. It is unclear that in the absence of the MCA or any
of the other new initiatives, that an equivalent amount of resources would have been
made available for other bilateral economic aid programs.
Congressional proposals to modify MCA funding levels. S. 925, as
amended, authorizes $1 billion for the MCA in FY2004, $300 million less than the
Administration request. It further authorizes $2.3 billion in FY2005 and $5 billion
for FY2006. Elsewhere in S. 925, authorizations for other State Department and
foreign aid programs are higher in a few cases than funding recommended by the
President. In order to stay within the budget resolution target for total foreign policy
spending in FY2004, the Foreign Relations Committee chose to reduce resources for
several accounts, including the MCA. H.R. 1950 authorizes $1.3 billion for FY2004,
the amount requested, plus $3 billion in FY2005 and $5 billion in FY2006.
In other congressional action that will directly effect MCA funding, the House
on July 23 approved H.R. 2800, the FY2004 Foreign Operations appropriations bill,
providing $800 million for the MCA. In the Senate, the Appropriations Committee
has recommended a $1 billion MCA funding level (S. 1426). Under either proposal,
the size of MCA programs in FY2004, the number of participating countries, and the
pace at which the initiative would move forward towards the $5 billion goal by
FY2006, likely would be reduced.

CRS-31
Appendix A — Comparison of Administration Proposal and Key
Congressional Modifications
Throughout this report, Congressional recommendations to alter key elements of the President’s MCA initiative are
discussed. The table below summarizes these changes.
Issue
Administration
Senate (S. 925)a
House (H.R. 1950)a
Board of Directors, chaired by
Sec. of State, with Treasury,
Board of Directors, chaired by
USTR, USAID, MCC CEO, and
Board of Directors, chaired by
the Sec. of State, with Treasury,
4 others nominated by the
MCA oversight
Sec. of State, with Treasury and
USAID, USTR, and the MCA’s
President from a Congressional
OMB
Chief Executive Officer (CEO)
list. Non-voting members
include OPIC, OMB, Peace
Corps, and TDA.
Independent Millennium
Challenge Corporation whose
Independent Millennium
CEO reports to and be under the
Independent Millennium
MCA organization
Challenge Corporation
direct authority and foreign
Challenge Corporation
policy guidance of the Sec. of
State
CEO “manages” the Corporation,
reporting to and under the direct
CEO “heads” the Corporation,
MCA coordinator
CEO of Corporation
authority and foreign policy
reporting to the President
guidance of the Sec. of State
Selection of
Board of Directors
Board of Directors
CEO of Corporation
eligible countries
Nine members named by the
CEO to advise on MCA policy,
MCC Advisory
review eligibility criteria,
None
None
Council
evaluate the MCC, assess MCC
capabilities, and make
recommendations to the CEO.

CRS-32
Issue
Administration
Senate (S. 925)a
House (H.R. 1950)a
FY2004 - IDA eligible
FY2004 - IDA eligible
FY2004 - IDA eligible
FY2005 - per cap GNP less than
FY2005 - per cap GNP less than
FY2005 - per cap GNP less
$1,435
Country income
$1,435
than $1,435
eligibility
FY2006 - per capita GNP less
FY2006 - per capita GNP less
FY2006 - per capita GNP less
than $2,975 only if funds exceed
than $2,975; low-middle income
than $2,975
$5 billion; low-middle income
countries capped at 20%
countries capped at 20%
15% of MCA funds available
10% of MCA funds available for
for countries demonstrating a
Aid to “near-miss”
countries failing to qualify
General support
development commitment but
countries
because of inadequate data or
fail to meet a sufficient number
missing one indicator
of performance indicators
CEO consultation with Congress
on eligibility criteria;
Disclosure in Federal Register
notification 15 days in advance
and on the Internet of eligible
on grants exceeding $5 million;
countries, programs supported,
Oversight and
MCA contracts and performance
“Compacts” with countries
and performance; proposed
reports
posted on the Internet.
published in Federal Register
performance indicators open to
and on the Internet; advance
public comment; annual report to
notification of aid termination;
Congress
annual reports to Congress from
the CEO and Advisory Council
FY2004 - $1.3 billion
FY2004 - $1 billion
FY2004 - $1.3 billion
Funding
FY2005 - no decision
FY2005 - $2.3 billion
FY2005 - $3 billion
FY2006 - $5 billion
FY2006 - $5 billion
FY2006 - $5 billion
a. The status of the Senate bill is based on S. 925, the Foreign Affairs Act, Fiscal Year 2004, as amended during debate on July 9 and
10. S. 925 remains pending in the Senate. Previously, the Senate Foreign Relations Committee had approved legislation authorizing
the Millennium Challenge Account in S. 1160. A modified text of S. 1160 was subsequently incorporated into S. 925 as Division
C on July 9. The House bill, H.R. 1950, is also a combined foreign policy authorization measure to which earlier MCA authorizing
text was added. The House International Relations Committee had reported H.R. 2441, which was incorporated, with modifications,
to H.R. 1950, and passed by the House on July 16.

CRS-33
Appendix B — 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)39 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 2002
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
39 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 FY2003, for example, the United States is
providing about $1.2 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.

CRS-34
aid transfers as a percent of GNP.40 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
ODA
from
Levels
from
ODA as
Fiscal
Levels
FY2003
(constant
FY2003
% of
Year
(current
baseline
FY2003
baseline
GDP
$s)
(nominal)
$s)
(real)
2000 actual
$11.174

$11.899

0.11%
2001 actual
$10.989

$11.449

0.11%
2002 estimate
$12.900

$13.150

0.12%
2003 estimate
$13.157

$13.157

0.12%
2004 request
$15.636
18.84%
$15.330
16.52%
0.14%
2005 projected
$17.436
32.52%
$16.770
27.46%
0.15%
2006 projected
$19.336
46.96%
$18.234
38.59%
0.15%
Sources: OMB, Department of State, and CRS assumptions and calculations.
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
MCA will grow to $5 billion by FY2006 in three installments of $1.3 billion (the
40 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.

CRS-35
request for FY2004), $1.8 billion (FY2005 projection), and $1.9 billion (FY2006
projection). The FY2004 total ODA figure is based on the FY2004 request and
includes not only the increase sought for the MCA, but a sizable growth in funding
for the President’s Global AIDS Initiative. The figures further assume that other
ODA will remain constant in FY2005 and FY2006, and that the baseline from which
to add the $5 billion MCA commitment will be FY2003 enacted levels. Other
assumptions would yield different results.
Based on these working assumptions, a $5 billion dollar increase by FY2006 for
the MCA would result in a $10.34 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 $18.23 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 47%
while in real terms, FY2006 funding would be nearly 39% 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 0.12% of
GDP to 0.15%.

CRS-36
Appendix C — 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.

CRS-37
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
West Bank/Gaza
$1,350
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
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.