Order Code RL32427
CRS Report for Congress
Received through the CRS Web
Millennium Challenge Account: Implementation
of a New U.S. Foreign Aid Initiative
Updated November 14, 2005
Larry Nowels
Specialist in Foreign Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Millennium Challenge Account: Implementation of a
New U.S. Foreign Aid Initiative
Summary
In a speech on March 14, 2002, President Bush outlined a proposal for a major
new U.S. foreign aid initiative. The program, referred to as the Millennium
Challenge Account (MCA), is managed by the Millennium Challenge Corporation
(MCC) and provides assistance, through a competitive selection process, to
developing nations that are pursing political and economic reforms in three areas:
ruling justly, investing in people, and fostering economic freedom. 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.
The MCC differs in several respects from past and current U.S. aid practices:
! the size of the $5 billion commitment;
! the competitive process that rewards countries for past and current
actions measured by 16 objective performance indicators;
! the pledge to segregate the funds from U.S. strategic foreign policy
objectives that often strongly influence where U.S. aid is spent; and
! the requirement to solicit program proposals developed solely by
qualifying countries with broad-based civil society involvement.
The Administration sought $1.3 billion for the MCA’s first year (FY2004), $2.5
billion for FY2005, amounts reduced by Congress to a combined $2.48 billion, about
one-third less requested. The President sought $3 billion for FY2006, double the
FY2005 level but less than the original $5 billion commitment for the third year.
Congress approved $1.77 billion.
Congress authorized the MCC in P.L. 108-199 (January 23, 2004). Since that
time, the MCC’s Board of Directors has selected 23 eligible countries for FY2004
— FY2006, and signed five Compacts with Madagascar (April 18, 2005), Honduras
June 13, 2005), Cape Verde (July 4, 2005), Nicaragua (July 14, 2005), and Georgia
(September 12, 2005). Other MCA implementation matters continue to unfold,
including the relationship of MCA and USAID, how to support “threshold”
countries, and the country programs.
A growing question raised by some Members of Congress concerns the level of
funding to support MCC programs. Some, noting that proposals received by the
Corporation in 2004 totaled more than $4.2 billion, fear that insufficient funds might
force the MCC to reduce the number of recipients or the size of the grants. Others,
however, believe that the slower-than-anticipated pace of Compact agreements
means that the Corporation has or will have enough resources, and support reductions
to the $3 billion FY2006 request. The Foreign Operations Appropriations, as passed
by Congress (H.R. 3057) provides $1.77 billion for FY2006.
This report will be updated as events unfold.

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Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
MCC Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
MCC Implementation Steps and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Establishing the Millennium Challenge Corporation . . . . . . . . . . . . . . . . . . 5
Naming FY2004 Candidate Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Publishing the Selection Criteria and Methodology . . . . . . . . . . . . . . . . . . . 6
Country Selection — FY2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Naming Candidate Countries — FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Country Selection — FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Continuity in the FY2005 Selection Round . . . . . . . . . . . . . . . . . . . . . 11
Excluding More Countries that Qualified . . . . . . . . . . . . . . . . . . . . . . 12
Naming Candidate Countries — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Country Selection — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Greater Board Selectivity? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Selection of Lower Middle-Income Countries is Less Clear . . . . . . . . 16
MCA Compacts and Program Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Initial MCA Compacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
“Threshold” Countries and U.S. Assistance . . . . . . . . . . . . . . . . . . . . . . . . 23
Role of USAID and the Future of Agency Programs in MCA Countries . . 24
Funding Issues — Previous and in the 109th Congress . . . . . . . . . . . . . . . . 25
MCA Request and Congressional Action for FY2006 . . . . . . . . . . . . 26
Pending Authorizing Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Modifies the Criteria for Determining the Income Grouping of
Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Strengthens Local Country Input in Compact Development . . . . . . . . 28
Assists Countries in the Preparation of Compacts . . . . . . . . . . . . . . . . 29
Sets a More Precise Timetable for Compact Preparation and
Signing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Allows Compacts to Cover a Longer Period . . . . . . . . . . . . . . . . . . . . 29
Permits Multiple Compacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Expands Consultation Requirements with Congress . . . . . . . . . . . . . . 29
Strengthens Transparency Requirements . . . . . . . . . . . . . . . . . . . . . . . 29
Recommends Larger Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
List of Tables
Table 1. Status of MCA Compacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Table 2. MCA Candidate, Eligible, and Threshold Countries — FY2004 . . . . 30
Table 3. MCA Candidate, Eligible, and Threshold Countries — FY2005 . . . . 31
Table 4A. MCA Low-Income Candidate, Eligible, and Threshold
Countries — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

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Table 4B. MCA Lower Middle-Income Candidate and Eligible
Countries — FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Table 5. MCC Performance Indicators for FY2006 . . . . . . . . . . . . . . . . . . . . . . 34
Table 6. Comparison of MCA Authorization Legislation . . . . . . . . . . . . . . . . . 35

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Millennium Challenge Account:
Implementation of a
New U.S. Foreign Aid Initiative
Most Recent Developments
On November 8, 2005, the Millennium Challenge Corporation’s Board of
Directors selected 20 low-income countries and three low-middle income nations to
participate in the program for FY2006. Of these 23 countries, 17 had been selected
in FY2004 and FY2005. New countries for FY2006 are Burkina Faso, East Timor,
El Salvador, the Gambia, Namibia, and Tanzania. The Board also designated 13
nations as Threshold Program countries, including Indonesia, Jordan, Kyrgyz
Republic, Moldova, and Ukraine which are new for FY2006.
On November 2, House-Senate conferees agreed to a $1.77 billion FY2006
appropriation for the MCC (H.R. 3057), a substantial reduction from the $3 billion
request.
On October 7, Representatives Hyde and Lantos, Chairman and Ranking
Member, respectively, of the House International Relations Committee, introduced
legislation (H.R. 4014) to re-authorize the Millennium Challenge Act of 2003. Key
provisions of the bill would authorize the Millennium Challenge Account (MCA)
through fiscal 2008, adjust the methodology for designating countries as low and
lower middle income, set time limits for completion of program proposals, allow for
a country to maintain two MCA programs concurrently, expand consultation with
Congress, and require the Millennium Challenge Corporation (MCC) to operate with
more transparency.
Also on October 7, the Senate confirmed the nomination of John Danilovich as
the new CEO of the Millennium Challenge Corporation. He previously served as the
U.S. Ambassador to Brazil and Costa Rica. Ambassador Danilovich replaced Paul
Applegarth who left the MCC in August. At his confirmation hearing in September,
Ambassador Danilovich pledged to streamline the MCC process, assist potential
MCA countries earlier in the process, and to increase the dollar size of future
Compacts in order to achieve the transformational development impact envisioned
the MCC concept.
On September 12, 2005, the Millennium Challenge Corporation signed a $295
million Compact with Georgia. Beginning on April 18, the MCC has signed four
other Compacts with Madagascar, Honduras, Cape Verde, and Nicaragua.

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CRS-2
Overview
In a speech on March 14, 2002, 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
funds, referred to as the Millennium Challenge Account (MCA), is managed by a
new Millennium Challenge Corporation (MCC) providing assistance, through a
competitive selection process, to developing nations that are pursing political and
economic reforms in three areas:
! Ruling justly — promoting good governance, fighting corruption,
respecting human rights, and adhering to the rule of law.
! Investing in people — providing adequate health care, education,
and other opportunities promoting an educated and healthy
population.
! Fostering enterprise and entrepreneurship — promoting open
markets and sustainable budgets.
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. It would also represent a fundamental change in the way the United States
invests and delivers economic assistance.
While the program was established and initially funded during the 108th
Congress, the 109th Congress is debating a major appropriation increase — to $3
billion — proposed for the MCA. Committees of jurisdiction have held several
oversight hearings, and could consider changes to the authorizing legislation
concerning such matters as selection criteria and methodology, operation and funding
of the “threshold” programs for those countries that just missed qualifying for MCA
grants, and program monitoring and oversight. Authorization for MCC operations
in FY2006 are included in S. 600, as reported by the Senate Foreign Relations
Committee. For funding matters, the House recommends a cut to the President’s $3
billion request to $1.75 billion (H.R. 3057), while the Senate Appropriations
Committee proposes $1.8 billion (also H.R. 3057).
MCC Background1
The concept is based on the premise that economic development succeeds best
where it is linked to free market economic and democratic principles and policies,
and where governments are committed to implementing reform measures in order to
achieve such goals. The MCC differs in several fundamental respects from past and
current U.S. aid practices:
1 For a more in-depth discussion of the original MCA proposal and issues debated by
Congress in 2003, see CRS Report RL31687, The Millennium Challenge Account:
Congressional Consideration of a New Foreign Aid Initiative.

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CRS-3
! the size of the $5 billion commitment;
! the competitive process that will reward countries for past actions
measured by 16 objective performance indicators;
! the pledge to segregate the funds from U.S. strategic foreign policy
objectives that often strongly influence where U.S. aid is spent; and
! the requirement to solicit program proposals developed solely by
qualifying countries with broad-based civil society involvement.
The new initiative, which Congress authorized in January 2004 (Division D of
P.L. 108-199),2 was scheduled to phase in over a three-year period, beginning in
FY2004. During the first year, MCC participation was limited to the 74 poorest
nations with per capita incomes below $1,415 and that were eligible to borrow from
the World Bank’s International Development Association. The list expanded in
FY2005 to include all countries with a per capita income below $1,465 (adding
another 13 nations). Beginning in FY2006 and beyond, all lower middle-income
countries with per capita incomes between $1,575 and $3,255 may compete for MCC
resources (adding another 29 countries in FY2006).
Country selection is based largely, but not exclusively, on the nation’s record
measured by 16 performance indicators related to the three categories, or “baskets,”
of good governance, economic freedom, and investing in people. Countries that
score above the median on half of the indicators in each of the three areas qualify.
Emphasizing the importance of fighting corruption, the indicator for corruption is a
“pass/fail” test: should a country fall below the median on the corruption indicator,
it will be disqualified from consideration unless other, more recent trends suggest
otherwise. (See Table 1 below for a complete list of the 16 performance indicators.)
Administration officials, since announcing the MCC initiative in 2002, said that the
selection process would be guided by, but not necessarily bound to the outcomes of
the performance indicators. Missing or old data, general trends, and recent steps
taken by governments might also be taken into account when annual decisions are
made.
Eligibility to receive MCA assistance, however, does not necessarily result in
an aid grant. Once selected, countries are required to submit program proposals —
referred to as MCA Compacts — that have been developed through a broad-based,
national discussion that includes input from civil society. The focus of program
submissions may vary among countries in size, purpose, and degree of specificity,
and are evaluated by the Corporation for, among other things, how well the Compact
supports a nation’s economic growth and poverty reduction goals. Only those
Compacts that meet the MCC criteria will be funded. It is expected that successful
Compacts will support programs lasting three to five years, providing a level of
resources roughly equivalent to the largest providers of assistance in the country. In
most cases, this will likely result in a significant increase of U.S. economic assistance
to MCA participant countries.
2 Table 2, found at the end of this report, provides a summary of major MCA issues and
compares positions approved by the House, Senate, and Conference Committee during the
2003 debate.

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CRS-4
To manage the new initiative, the Administration proposed and Congress
authorized the creation of a Millennium Challenge Corporation (MCC), an
independent government entity separate from the Departments of State and the
Treasury and from the U.S. Agency for International Development (USAID). The
MCC plans for an eventual staff of about 200, drawn from various government
agencies, non-governmental organizations, and the private sector, and led by a CEO
confirmed by the Senate. A Board of Directors, chaired by the Secretary of State and
composed of the Secretary of the Treasury, the USAID Administrator, the U.S. Trade
Representative, and the Corporation’s CEO, oversees operations of the MCC and
makes the country selections. Four additional Board members, two of which have
yet to be confirmed by the Senate, are individuals from the private sector drawn from
lists of proposed nominees submitted by Congressional leaders.3
The decision to house the MCA in a new organization was one of the most
debated issues during early congressional deliberations of the President’s foreign aid
initiative. The Administration argued that because the MCA represents a new
concept in aid delivery, it should have a “fresh” organizational structure,
unencumbered by bureaucratic authorities and regulations that would interfere in
effective management. Critics, however, contended that if the MCA is placed
outside the formal U.S. government foreign aid structure, it would lead to further
fragmentation of policy development and consistency. Some believed that USAID,
the principal U.S. aid agency, should manage the MCA, while others said that the
MCA should reside in the State Department where more U.S. foreign policy entities
have been integrated in recent years. At least, some argued, the USAID
Administrator should be a member of the MCC Board, which had not been proposed
in the initial Administration request.
For FY2004, the Administration sought $1.3 billion for the MCA’s first year,
a level reduced by Congress to $994 million. The FY2005 budget proposed $2.5
billion while Congress approved $1.488 billion. The combined FY2004/2005
funding level of $2.48 billion is about one-third less than requested. The President
initially planned a $5 billion MCA program by FY2006, but proposed $3 billion for
next year. Administration officials say that given congressional reductions the past
two years and competing demands elsewhere, a $3 billion request is more realistic
for FY2006. Even this reduced level has been trimmed by Congress, as the House
recommends $1.75 billion while the Senate proposes $1.8 billion (H.R. 3057;
Foreign Operations appropriations).
MCC Implementation Steps and Issues
The passage of legislation on January 23, 2004 authorizing and funding the
MCC for FY2004 (Division D of P.L. 108-199) launched a period of 90 days during
which the new Corporation formed, issued required reports, consulted with Congress
3 On July 13, 2004, the Senate confirmed two of the four new Board members: Kenneth
Hackett, President and CEO of Catholic Relief Services, and Christine Todd Whitman,
former Governor of New Jersey and former head of the Environmental Protection Agency,
2001-2003. No further nominees have been submitted by the White House.

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CRS-5
and the public, and selected first year participant countries. Within 10 days of
enactment, the Board of Directors held its initial meeting to establish the program,
and over the following weeks the Corporation identified “candidate” countries for
FY2004, published the criteria and methodology to be used for country selection,
solicited public comments, issued guidelines for Compact proposals, and, on May 6,
2004, selected 16 countries to participate in the MCA’s first year of operations. This
was followed on November 10 with the selection of FY2005 eligible MCA countries,
an action that added one new participant to the FY2004 list. The MCA Board issued
its third round of selections on November 8, 2005, choosing 23 countries, six of
which are new for FY2006. In addition, 18 countries have been named as threshold
nations — those that just missed qualifying as eligible countries — for FY2005 and
FY2006.
Implementation matters that continued to unfold in 2005 included the
relationship of MCC programs with those operated by USAID, how the Corporation
and USAID will support threshold countries to better prepare for future performance
reviews, the awarding of MCA grants — in the form of Compacts — to MCA
eligible countries, funding for FY2006, and the selection of FY2006 eligible
countries.
Establishing the Millennium Challenge Corporation
On February 2, 2004, the Board of Directors met, agreed to Corporation by-
laws, and approved then-Under Secretary of State Larson as the interim CEO.
Subsequently, the President nominated Paul Applegarth to be the permanent MCC
CEO, an individual confirmed by the Senate on May 5.4
Naming FY2004 Candidate Countries
Also on February 2, the MCC Board issued a list of 63 “candidate” countries
that would be reviewed for possible selection as MCA participants in FY2004. These
countries, according to authorizing legislation, must be eligible for assistance from
the World Bank’s International Development Association, have a per capita income
of $1,415 or less, and not be otherwise ineligible to receive U.S. assistance. The
latter condition eliminated twelve countries — Burma, Burundi, Cambodia, Central
African Republic, Cote d’Ivoire, Guinea-Bissau, Liberia, Serbia, Somalia, Sudan,
Uzbekistan, and Zimbabwe — that were statutorily barred from receiving American
aid.5
4 CEO Applegarth resigned his position, effective August 8, 2005. President Bush has
nominated John Danilovich, currently the U.S. Ambassador to Brazil, as the new CEO.
5 Various types of aid restrictions applied to these countries. For several — Burundi,
Central African Republic, Cote d’Ivoire, Guinea-Bissau, and Sudan — U.S. aid was blocked
because an elected head of government had been deposed by a military coup. For Cambodia
and Uzbekistan, legislation banned FY2004 assistance to the central governments of these
countries. Aid restrictions imposed on nations not cooperating in counter-narcotics efforts
(Burma), that are on the terrorist list (Sudan), or in arrears on debt owed the United States
(Liberia, Somalia, and Zimbabwe) also applied. Serbia could not receive aid in FY2004
(continued...)

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CRS-6
Publishing the Selection Criteria and Methodology
Pursuant to reporting requirements set in the MCC legislation, the Corporation
on March 5, 2004 sent to Congress an overview of the criteria and methodology that
would be used to determine the eligibility of the 63 candidate countries in FY2004.
The report suggested that there would be relatively few and only minor changes to
the criteria and methodology that had been outlined 15 months earlier. The same 16
performance indicators, as listed in Table 1 below, would be utilized. In a few cases,
data sources shifted from international institutions to national governments. This
was especially true in cases where existing data for an indicator were old or
incomplete.
Although the Corporation did not alter any of the original 16 performance
indicators, it attempted to address additional criteria added by Congress in P.L. 108-
199 through the use of supplemental data and qualitative information. While the
legislative authorities broadly match criteria proposed by the Administration,
lawmakers included four additional matters on which to evaluate a country’s
performance. These relate to the degree to which a country:
! recognizes the rights of people with disabilities;
! supports a sustainable management of natural resources;
! respects worker rights; and
! makes social investments, especially in women and girls.
For an evaluation of the rights of people with disabilities, the MCC reported that it
would draw on information in the State Department’s annual Human Rights Report,
which includes a discussion of discrimination based on disability. Regarding natural
resource management, the Corporation would also use the Human Rights Report as
supplemental information on such issues as access to sanitation, deforestation,
conservation of land and marine resources, land tenure institutions, and protection
of threatened and endangered species. The State Department’s Human Rights Report
would also be used for additional information regarding worker rights, while
statistics on girls’ primary enrollment rates would supplement the four social
investment performance indicators.
The MCC also noted that it would use the most recent release (then October
2003) of Transparency International’s Corruption Perception Index to update and
supplement the World Bank’s survey data on which corruption performance indicator
is based. This was necessary because the World Bank information was last published
in March 2003. Since the corruption indicator is a “pass/fail” measure, the quality
and timeliness of the data are especially important.
5 (...continued)
unless the President issued a determination stating, among other things, that the government
was cooperating with the International Criminal Tribunal. Notwithstanding these
restrictions, each country remained eligible for humanitarian assistance from the United
States.

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CRS-7
Given the range and diversity of suggestions offered throughout the public and
congressional debate of the MCC, many observers were surprised that the
Corporation did not propose more substantive changes to the criteria and
methodology. Some questioned how seriously the Administration considered
alternative approaches and whether the Corporation would be open to future
revisions.6 During the public comment period and at congressional oversight
hearings, some suggested that existing data sources needed to be refined or new
surveys created in order to specifically measure a country’s commitment on the four
criteria added by Congress.
After further study of the criteria and methodology, the Corporation announced
on August 26, 2004, a revised set of performance indicators that were used for the
FY2005 selection process. The MCC lowered the inflation rate threshold from 20%
to 15%, making it somewhat more difficult to pass this test (only 6 of the 63
candidate countries failed this test for FY2004). An indicator measuring girls’
primary education completion rates replaced a broader measure used in FY2004 that
did not disaggregate primary education graduation by gender. As noted above,
including the means to measure country performance on key women and girls issues
was one of the requirements added by Congress during deliberation on MCC
authorizing legislation.
For FY2006, the Corporation made further changes in the criteria and
methodology. The most notable is the addition of a new indicator — the Cost of
Starting a Business — that replaced the Country Credit Rating, a measure that was
used in the FY2004 and FY2005 evaluation process. Data for the Cost of Starting
a Business are drawn from the World Bank’s Doing Business report, the same source
for another MCC indicator of Days to Start a Business. The Corporation believes
that not only does the new indicator have a strong correlation with economic growth,
but that it is a measurement that may encourage governments to take action in order
to improve their scores. Since the initial use of the indicator Days to Start a
Business, MCA candidates countries have introduced many business start-up
reforms, the results of which have been reflected in a lowered median for this
category. MCC officials hope that adding an indicator for the Cost of Starting a
Business will stimulate additional policy improvements. They believe that the
Country Credit Rating indicator is not as well linked to policy reforms and that it has
a greater income bias than other MCC indicators.
The Corporation also modified the principal, in selected cases, that countries
must score above the median in order to pass a hurdle, with a rule that scores at the
median will represent a passing grade. This is most likely to come into play for those
indicators (civil liberties, political rights, and trade policy) where performance is
measured on a relatively narrow scale of 1-5 or 1-7. A number of countries fall
exactly on the median of these indicators and the methodology change will allow the
MCC to make a more refined determination of whether a country passes or fails these
hurdles.
6 See, for example, Steve Radelet, et al., A Comment on the Millennium Challenge Account
Selection Process, Center for Global Development, March 9, 2004.

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CRS-8
The MCC further indicates that it will explore additional criteria and
methodology changes for the future. Under consideration are options to:
! identify a measurement related to natural resource management; the
MCC has created a working group to study possibilities.
! review other possible indicators that would better measure trade
barriers that are linked with economic growth.
! consider additional gender-relation indicators; the MCC looked
closely at the indicator of Skilled Attendants at Birth (a proxy for
maternal mortality) but decided for now that the data lack the
necessary quality and coverage.7
Country Selection — FY2004
On May 6, the MCC Board of Directors determined that 16 countries would be
eligible for FY2004 MCA funding and invited each to submit program proposals:
Armenia
Madagascar
Benin
Mali
Bolivia
Mongolia
Cape Verde
Mozambique
Georgia
Nicaragua
Ghana
Senegal
Honduras
Sri Lanka
Lesotho
Vanuatu
As expected, the selection process raised a number of questions and concerns. The
Administration had previously said that the Board would be guided by, but not
entirely bound to, the outcome of the performance indicator review process; that
Board members could apply discretion in their selection. Performance trends,
missing or old data, and recent policy actions might come into play during selection
deliberations, officials noted.
The final selection reflected decisions that both strictly followed the
performance indicator outcomes and applied Board discretion to take into account
other factors. Ten of the countries complied with the stated criteria: performing
above the median in relation to their peers on at least half of the indicators in each
of the three policy “baskets” and performing above the median on corruption. The
Board also examined whether a country performed substantially below average on
any single indicator and whether their selection was supported by supplemental
information. Each of the ten countries also passed these additional tests.
For ten other countries, however, some discretion was applied by the Board. In
three cases, countries which met the criteria but fell significantly below average on
7 For a complete discussion of this issue, see Report on the Criteria Methodology for
Determining Eligibility of Candidate Countries for Millennium Challenge Account
Assistance in FY2006, at [http://www.mcc.gov], Congressional Reports.

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CRS-9
one indicator were still selected by the Board due to recent policy changes or positive
trend lines. Cape Verde, for example, scored poorly on the Trade Policy indicator,
but the Board took into account the country’s progress towards joining the World
Trade Organization and implementing a value added tax that will reduce reliance on
import tariffs. Lesotho did not score well on the measurement for Days to Start a
Business. The MCC Board, however, took note of Lesotho’s creation of a central
office to facilitate new business formation and saw positive performance on other
factors related to business start-ups. Sri Lanka scored far below the median on Fiscal
Policy, but the most recent trends suggested that the government was making
progress in reducing its budget deficit.
For three other countries — Bolivia, Georgia, and Mozambique — the Board
deviated from a strict application of the selection criteria because of evidence that the
governments were taking corrective actions in the deficient areas. Bolivia fell at the
median (as opposed to above the median) on the corruption indicator, something that
would eliminate it from consideration. The Board, however, noted that President
Mesa, who took office in October 2003, had created a cabinet position to coordinate
anti-corruption activities and an office to investigate police corruption. Georgia, with
a newly elected government that had created an anti-corruption bureau and taken
other steps to fight corruption, was also selected despite scoring below the median
on corruption and three other “ruling justly” indicators. Mozambique, which failed
on corruption and each of the four “investing in people” indicators, was chosen based
on supplemental data that was more current than information available from the
primary data sources. This evidence, the Board felt, demonstrated Mozambique’s
commitment to fighting corruption and improving its performance on health and
education.
On the other hand, the MCC Board chose not to select four countries that
technically met the performance criteria but fell substantially below the median on
one or more indicator. In each of these cases, the Board did not believe that the
government was taking any action to improve its performance. Although Bhutan,
Mauritania, and Vietnam passed the corruption hurdle and half of the “ruling justly”
indicators, they scored very low on the measurements for Political Rights and Civil
Liberties, and in Vietnam’s case, on the Voice and Accountability indicator. A fourth
country — Guyana — was also not selected despite passing the necessary hurdles.
It scored particularly low on the Fiscal Policy measurement.8
It has been long assumed by MCC officials and close observers of the MCA
initiative that when the country selections were announced, there would be
disagreements and possible surprises in the final list, especially if the Board exercised
its discretionary authority as it did for FY2004 participants. Representative Lowey,
for example, expressed her view at a May 13, 2004 House Appropriations Committee
hearing that East Timor, which failed to pass the “economic freedom” hurdle in part
due to missing data on two of the indicators, should have been selected. CEO
Applegarth responded that East Timor is a new nation and that it was premature to
8 For a complete statement regarding the Board’s rationale, see Report on the Selection of
MCA Eligible Countries for FY2004, found at [http://www.mcc.gov], “Congressional
Reports.”

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CRS-10
conclude that it was a “high-performing” country. He acknowledged, however, that
East Timor should be given close consideration in the future if the current trend lines
continue.
Besides East Timor, some suggested that Kenya should have been included
because of its new government’s commitment to education and anti-corruption
efforts. USAID Administrator Natsios acknowledged at the May 13 hearing that
Albania was a “close call,” failing because it scored slightly below the median on
corruption. Like Albania, Malawi and Moldova would have qualified on the basis
of performance if not for slightly failing scores on corruption. Several small island
states, including Kiribati, Sao Tome, and Tonga, were not selected even though the
absence of data for several categories may have played a role.9
Despite these questions over specific country eligibility, the selection process
appeared to have satisfied two major concerns that have been consistently expressed
over the past year. Based on earlier analysis, some argued that Africa would be
under-represented in the final selection process, with perhaps as few as three regional
states participating. In fact, eight, or half of the first year qualifying nations are from
Africa.
Selection of countries that would give the appearance of geostrategic
considerations was an additional concern of many who view the absence of security-
related factors from MCA decision-making as one of the most attractive features of
the initiative. For the most past, the Board appeared to have avoided this concern.
Had the Board used its discretionary powers to select Indonesia, for example, some
critics would have likely charged that the decision stemmed more from Jakarta’s role
in the war on terrorism than on strict policy performance. Indonesia passed all
necessary hurdles except for corruption. Some, nevertheless, have questioned
whether Georgia’s selection was driven by broad U.S. foreign policy objectives of
assisting a smooth political transition in the country rather than a choice based on
performance.10 Likewise, Bolivia, a country in which the United States maintains
strong counter-narcotics goals, had been experiencing a period of instability despite
strong performance prior to October 2003. Both Georgia and Bolivia were selected
despite not strictly meeting the MCA performance criteria.
Naming Candidate Countries — FY2005
On July 20, 2004, the MCC Board of Directors launched the initial step in the
FY2005 selection process by naming 70 candidate countries, 7 more than were
reviewed for FY2004. After adjusting the per capita income upward to $1,46511 and
9 As noted below, East Timor, Albania, and Sao Tome were subsequently selected as three
of the seven “threshold” countries that will receive assistance to help the country meet the
MCA requirements.
10 See Steve Radelet, A Note on the MCC Selection Process for 2005, September 23, 2004,
found at [http://www.cgdev.org].
11 The MCC plans to adjust the per capita income threshold each year to correspond to the
(continued...)

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CRS-11
dropping the requirement that a country must be an IDA-eligible borrower from the
World Bank, 11 new countries were added to the list: China, Egypt, Equatorial
Guinea, Iraq, Morocco, Paraguay, Philippines, Swaziland, Turkmenistan, Tuvalu, and
Ukraine. Four countries fell off the FY2005 list that had qualified in FY2004 —
Albania, Bosnia and Herzegovina, Cape Verde, and Tonga — because their per
capita income grew beyond the $1,465 cutoff. Thirteen other nations were excluded
because they were ineligible for other U.S. economic assistance.12
Country Selection — FY2005
Meeting on November 8, the MCC Board of Directors made its selection of
FY2005 eligible countries:
Armenia
Mali
Benin
Mongolia
Bolivia
Morocco
Georgia
Mozambique
Ghana
Nicaragua
Honduras
Senegal
Lesotho
Sri Lanka
Madagascar
Vanuatu
The Board chose one new country for FY2005 — Morocco — while 15 of the 16
nations included for FY2004 were determined eligible again for FY2005. Cape
Verde was not selected due to the fact that its per capita GNI exceeded the $1,465
ceiling. Cape Verde, however, remained eligible for MCA support using FY2004
funds. Board selections represented both a high degree of continuity between
FY2004 decisions as well as a sharp difference in the degree to which it applied its
discretionary authority for qualifying or denying countries for FY2005.
Continuity in the FY2005 Selection Round. The fact that each country
(except Cape Verde) selected for FY2004 MCA participation was also declared
eligible for FY2005 should not be surprising, given the nature of the MCA concept.
The Board identified in May 2004 what it determined to be the 16 “best performers”
based on the assumption that these countries had, and would continue to express, a
strong commitment to the types of economic, governance, and social policy reforms
measured by the MCC. Absent a substantial negative development since May, there
11 (...continued)
per capita income cutoff of the “historic ceiling” of IDA lending, a calculation made by the
World Bank. In future years when all lower middle-income countries will be eligible to
compete, the MCC also will adjust that threshold — which grew from $2,975 in 2003 to
$3,035 in 2004 and to $3,255 in 2005 — in the consideration of determining candidate
countries.
12 Eleven of these countries were also excluded in FY2004. Serbia, which was barred from
consideration for FY2004, exceeded the per capita income limit for FY2005 so was not
under consideration. Syria and Cuba, which became potential candidate countries beginning
in FY2005, were excluded because of a ban on direct aid to the countries. See Footnote 5,
above, for a complete list of countries and aid restrictions.

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CRS-12
was a presumed expectation that these same countries would score well in a
subsequent performance comparison with their income peers. Moreover, except in
some extreme situations, evidence of a slide in policy performance as measured
through the various data sources would likely lag behind the actual policy shift and
not be reflected in the immediate data updates.
In addition, two other factors that may not apply in future years seem to have
affected the outcome for FY2005. First, with the selection dates for FY2004 and
FY2005 coming only six months apart — rather than one year, as should be the case
in the future — it was likely that the data would indicate less change than might be
the case if the comparisons occurred over a longer period. Between May and
November, several of the data sources upon which the 16 performance indicators are
based did not update or revise their figures.13 As a result, the review of countries for
FY2005 was based on much of the same data and rankings as had been the case for
the FY2004 selection.
Moreover, the addition of 13 new countries for consideration in the FY2005
round had the effect for at least six of the indicators of lowering the median against
which countries were compared. Because of this, if a country scored well — above
the median — in the FY2004 selection decision, it was likely that it would score the
same or better in the review for FY2005 where medians declined. For example, in
May Bolivia fell exactly at the median on the corruption indicator. But in November,
when the median for corruption dropped somewhat after new countries were added,
Bolivia scored above the median even though Bolivia’s score on corruption did not
change. This phenomena is unlikely to be repeated again to the same extent since
countries in the low-income group will be added or subtracted only if their economy
grows beyond the per capita income ceiling or U.S. foreign aid sanctions are applied
or lifted since the last review. The net effect is that the core set of low-income
countries competing for MCA selection is unlikely to change as much as it did in
FY2005, thereby reducing the extent to which the median will be altered simply
because of the addition of new countries.
Excluding More Countries that Qualified. Despite the degree of
continuity between FY2004 and FY2005 in the selection of eligible countries, the
MCC Board departed somewhat from the previous round by not selecting a large
number of countries that technically met the MCA performance criteria. Many
observers raised questions over the FY2005 selections regarding the countries that
were not selected rather than those that were.
As noted above, in May 2004, the Board chose not to select four countries —
Bhutan, Guyana, Mauritania, and Vietnam — although each passed the minimum
number of indicators. The Board decided to exclude these four because they scored
13 This is not true for the performance indicators of Inflation and Primary Girls Graduation
Rate, which were modified for the FY2005 selection, or for the indicators measuring Days
to Start a Business, Civil Liberties, and Political Freedom which were updated in 2004. For
some of the other economic and social investment indicators where data were drawn from
national sources, revised figures were used in the FY2005 selection, but only where
available. World Bank data for six governance-related indicators and the Trade Policy
measurement, however, were not revised between May and November 2004.

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CRS-13
“substantially below” the median on one or more measurements, although without
defining precisely what represented a mark “substantially below”the median.
For FY2005, the Board did not select 10 countries that met the criteria,
including three of the four left out of the FY2004 round (Mauritania did not meet the
minimum qualifications). In addition, for FY2005 Burkina Faso, China, Djibouti,
Egypt, Nepal, the Philippines, and Swaziland met the minimum standards but were
not selected. The Corporation offered little explanation as to why these countries
were not chosen.14 It appears, however, that scoring “substantially below” — perhaps
in the lowest 25th percentile — has become a de-facto criteria for exclusion. For
example, the Corporation’s CEO Paul Applegarth commented that the Philippines,
a country that passed 13 of the 16 indicators, did not qualify because Manilla scored
“substantially below” the median on tests for health expenditures and fiscal policy,
and that more recent trends indicated the fiscal policy situation was deteriorating
further.15 Each of the other nine nations that met the minimum qualifications but
were not selected also had one score in the 25th percentile, although the Corporation
has not commented on whether this was the reason for not choosing them.
Another possible reason for limiting the number of qualifying countries in the
FY2005 round might be due to funding reductions that were anticipated in early
November. The Administration had requested combined FY2004/FY2005
appropriations of $3.8 billion, but was more likely, at the time of selection, to have
available 25%-35% less, depending on the outcome of congressional debate on the
FY2005 budget. Corporation officials have said that reduced funding would lead to
fewer countries assisted and/or smaller grants per country, a situation that would be
complicated further by qualifying additional nations.
Instead, the Board of Directors invited three of these 10 countries — Burkina
Faso, Guyana, and the Philippines — to participate in the Threshold Program,
intended to help “near-miss” nations take steps to strengthen areas that would help
them qualify for full MCA assistance in the future. Burkina Faso became the first to
sign a Threshold Agreement on July 22, 2005.
Another Board departure in the FY2005 selection process was to avoid using its
discretionary authority to qualify countries that did not meet the minimum
performance indicators. In May, the Board chose three nations — Bolivia, Georgia,
and Mozambique — that did not pass the so-called “hard-hurdle” of corruption. The
latter two again qualified despite falling below the median on corruption, while
Bolivia did not require an exemption after the median dropped below its score with
the addition of new countries. For FY2005, five nations — Malawi, Moldova,
Paraguay, Tanzania, and Ukraine — passed the required number of performance
14 The MCC’s authorizing legislation (section 608(d)) requires the Corporation’s CEO to
provide justification to Congress regarding only those countries declared as eligible for
MCA assistance and for those selected for Compact negotiation. Otherwise, there is no
statutory requirement for the MCC to comment on its decision-making process, including
the rationale for not selecting specific countries.
15 Comments by Paul Applegarth at a State Department Foreign Press Center Briefing,
November 9, 2004.

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CRS-14
indicators, except corruption. Although Malawi, Paraguay, and Tanzania are
Threshold Countries, none of the five were chosen for full MCA status.
Naming Candidate Countries — FY2006
On August 5, the MCC released a list of 69 low-income countries and 29 lower
middle-income nations that were evaluated for MCA grants in FY2006. The number
of low-income nations — those with a per capita GNI of less than $1,575 — was one
less than the previous year (Equatorial Guinea was dropped) while all of the lower
middle-income group, with per capita GNI between $1,575 and $3,255, were new to
the MCA selection process.16 Fifteen nations were excluded from the FY2006
candidate country list because they are ineligible under existing law to receive U.S.
economic aid. Most had been barred in prior years as well.17
Country Selection — FY2006
On November 8, 2005, the MCC Board of Directors made its selection of
FY2006 eligible countries, and, for the first time, selected participants in both the
low-income and lower middle-income groups:
Low-Income Countries
Armenia
Madagascar
Benin
Mali
Bolivia
Mongolia
Burkina Faso*
Morocco
East Timor*
Mozambique
The Gambia*
Nicaragua
Georgia
Senegal
Ghana
Sri Lanka
Honduras
Tanzania*
Losotho
Vanuatu
16 Each year, the MCC adjusts the low-income country per capita income threshold to
correspond to the per capita income cutoff of the “historic ceiling” of IDA lending, a
calculation made by the World Bank. The range of per capita GNI for the lower middle-
income group is also drawn from the World Bank.
17 For several — Burundi, Central African Republic, Cote d’Ivoire, and Sudan — U.S. aid
is blocked because an elected head of government has been deposed by a military coup. For
Cambodia and Uzbekistan, legislation bans FY2005 assistance to the central governments
of these countries. Aid restrictions imposed on nations not cooperating in counter-narcotics
efforts (Burma), that are on the terrorist list (Cuba, Iran, North Korea, Sudan, and Syria),
not complying with minimum trafficking in persons standards (Burma and Sudan), or in
arrears on debt owed the United States ( Somalia, and Zimbabwe), also apply. Serbia and
Bosnia and Herzegovina are not eligible for aid in FY2005 unless the President issues a
determination stating, among other things, that the governments are cooperating with the
International Criminal Tribunal.

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CRS-15
Lower Middle-Income Countries
Cape Verde
Namibia
El Salvador*
* New for FY2006.
All 17 countries previously selected in FY2004 or FY2005, or both years, again
qualified in FY2006. Four new low-income countries are added for FY2006 —
Burkina Faso, East Timor, The Gambia, and Tanzania — plus two new lower
middle-income nations — El Salvador and Namibia.18 None are the four low-
income nations are surprising. Three — Burkina Faso, East Timor, and Tanzania —
were chosen last year as Threshold countries, meaning they were “near-misses” in
FY2005. The Gambia improved its scores significantly between FY2005 and
FY2006, including those for inflation, fiscal policy, controlling corruption, and other
governance indicators. The rationale for selecting any lower middle-income
countries, on the other hand, and El Salvador and Namibia in particular, is less clear,
as discussed below.
Greater Board Selectivity? Given the likelihood that the MCC would have
substantially less appropriated funds for FY2006 than it had requested, a number of
observers argued that now was not the time to expand the list of eligible countries to
a great extent, especially for cases where Board discretion would be necessary to
qualify a country that did not pass a sufficient number of indicators. Instead, many
asserted, the Board should be more selective, keeping the number of new participants
to a few so that future Compacts could be larger and emphasize “transformational”
development opportunities as the MCA program envisioned.
The Board seemed to heed this advice for the low-income group by not choosing
eight countries that qualified and not using its discretionary powers to select any new
nations that failed to meet the minimum requirements.19 Bhutan, China, and Vietnam
passed enough hurdles but did not qualify, as was the case the past two years, based
on very low scores on political rights, civil liberties. Kiribati, the Philippines, and
India were not selected most likely because some of their scores were substantially
below the median, which has become a marker used by the Board previously. India
also presents a challenging case for the Board in that despite qualifying, it is a
country with a significantly large poor population which would require a sizable
MCA Compact in order to produce a reasonable degree of impact on poverty
reduction. It is also a nation with the means to attract capital and investment from
other sources. Egypt, also not selected, falls into a somewhat different category as the
second largest recipient of annual U.S. assistance based on a strategic rationale. The
18 Cape Verde was also selected in the new lower middle-income country grouping. Cape
Verde, however, had been previously chosen in FY2004 when its income placed it in the
low-income grouping, and signed an MCA Compact on July 4, 2005.
19 Georgia and Senegal were selected despite not passing the necessary hurdles, but both had
been chosen in FY2004 and FY2005.

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CRS-16
reason for not selecting Uganda, despite having passed 12 of the 16 indicators and
not falling significantly below the median on the other 4, is less obvious.
Selection of Lower Middle-Income Countries is Less Clear. Whether
to include relatively more wealthy nations — those with a per-capita income higher
than $1,575 — in the MCA program has been debated since the launch of the
initiative. A number of analysts have argued that especially given the less-than-
anticipated budget available to the MCC, the Board should refrain from selecting any
lower middle-income countries (LMICs), at least in the FY2006 round.20
Of the eight LMICs (out of 32 total) that passed sufficient performance hurdles,
the Board chose two to participate in FY2006. In addition, the Board also selected
Cape Verde, a country that passed only two of the six economic performance
indicators and therefore, did not technically qualify.21 It appears, however, that the
Board could have decided to select none of the lower middle-income nations by using
criteria it has applied consistently in the two previous rounds. Moreover, it is not
clear why the Board chose the two that did qualify and excluded others.
All eight LMICs that passed the performance indicator test fell significantly
below the median on at least one of the indicators. El Salvador and Namibia, the two
that were selected, both had low scores on fiscal policy. El Salvador also scored well
below the median on the costs of starting a business, while Namibia also did poorly
on days to start a business and immunization rates. The other six that were not
chosen — Brazil, Bulgaria, Jordan, Samoa, Thailand, and Tunisia — also performed
substantially below the median in at least one area, although Jordan was selected to
participate in the Threshold program. What separated these latter six from El
Salvador and Namibia, however, has not been explained by the Board.
MCA Compacts and Program Proposals
Once declared as eligible, countries may prepare and negotiate program
proposals with the MCC. The proposals are referred to as MCA Compacts. Only
those Compacts that demonstrate a strong relationship between the program proposal
and economic growth and poverty reduction will receive funding. Not all qualified
MCA countries may submit successful Compacts.
While acknowledging that Compact contents likely will vary, the Corporation
expects each to discuss certain matters:
! a country’s strategy for economic growth and poverty reduction,
impediments to the strategy, how MCA aid will overcome the
20 See, for example, Steve Radelet, Kaysie Brown, and Bilal Siddiqi, “Round Three of the
MCA: Which Countries are Most Likely to Qualify in FY 2006?” Center for Global
Development, October 27, 2005.
21 Cape Verde had been classified as an eligible low-income country in FY2004 and signed
a Compact in July 2005. The Cape Verde case, however, also points out a limitation in
using the system of 16 performance indicators. For two of the economic categories, no data
are available for Cape Verde, resulting in a failing score on those hurdles.

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CRS-17
impediments, and the goals expected to be achieved during
implementation of the Compact.;
! why the proposed program is a high priority for economic
development and poverty reduction and why it will succeed; the
process through which a public/private dialogue took place in
developing the proposal;
! how the program will be managed, monitored, and sustained after
the Compact expires;
! the relationship of other donor activities in the priority area;
! examples of projects, where appropriate;
! a multi-year financial plan; and
! a country’s commitment to future progress on MCA performance
indicators.
Initial MCA Compacts.22 The Corporation did not set hard deadlines for
Compact submissions in order to allow countries adequate time to conduct a national
dialogue over the contents of the program proposal.23 By December 1, 2004, the
MCC had received proposals and “concept papers” from 15 of the 16 FY2004
eligible countries, and began the next phase — negotiating formal Compacts — with
several countries. The MCC signed its first Compact, with Madagascar, on April 18,
2005, an event that has been followed by four other signings with Honduras (June
13), Cape Verde (July 4), Nicaragua (July 14), and Georgia (September 12).
Two features of the first series of Compacts have drawn particular attention.
First, most of the Compacts include a similar sector concentration, focusing on
agriculture and transportation infrastructure projects. While these activities are well
justified, the similarity across Compacts is somewhat surprising. Given the wide
diversity of conditions in each of the countries, plus the Corporation’s willingness
to support all types of programs, many observers had expected to see a greater degree
of variation among the Compacts. Some believe that social sectors, including those
in health and education, should be receiving greater attention in Compact design.
Others had expected greater variety in aid delivery mechanisms, and are concerned
that the MCC is reluctant to approve sector grants and other types of budget support
assistance. While there can be greater accountability risks associated with this kind
of aid, countries that qualify for MCA support are selected because they have already
demonstrated stronger performance in managing resources and fighting corruption.24
As subsequent Compacts are signed, the issue of sector focus is likely to be closely
watched.
22 Details on each of the negotiated Compacts can be found at the MCA website:
[http://www.mcc.gov].
23 H.R. 4014, introduced on October 7, 2005, expresses the sense of Congress that the MCC
should encourage countries to submit Compact proposals within one year of being declared
eligible, enter into a Compact within two years, and to consider removing countries from the
status of eligibility if they do not comply with these guidelines in a timely and good faith
manner.
24 James Fox and Lex Rieffel, The Millennium Challenge Account: Moving Toward Smarter
Aid. The Brookings Institution, July 14, 2005, p. 24.

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CRS-18
A second closely examined characteristic of the early Compacts has been the
dollar size of the grants; or more specifically, the lower-than-anticipated funding
level. While Administration officials have said repeatedly that Compacts will be
funded at various levels depending on the nature and potential impact of the proposal,
the presumption has been that the MCA grant would represent a sizable increase in
U.S. assistance to the eligible country. In order to realize its potential as a
“transformational” aid program and to provide sufficient incentives to countries
requesting “breakthrough” projects, the MCC says that the size of its grants must
place MCA assistance among the top aid donors in a country.25 Some had estimated
that once the Corporation’s budget reached $5 billion, each Compact would be
supported with annual resources in the $150-$200 million range.26 These levels
could vary up or down depending on many factors, such as the number of people
living in poverty, the size of the economy, and the scope of the proposed projects.
Most of the first five Compacts, however, do not appear to meet the anticipated
financial allocation thresholds. Madagascar’s four-year, $110 million Compact will
result in a roughly doubling of U.S. assistance to the country, but will not place MCA
assistance among the top donors. France is the largest bilateral donor, disbursing on
average $82 million per year, 2000-2003. The European Commission’s aid program,
2001-2003, has averaged $63 million per year, while the World Bank’s International
Development Association is Madagascar’s largest source of concessional assistance
of about $170 million lent in each of 2002 and 2003.27 The $110 million Compact
for Madagascar is also not very large relative to the country’s population. Of the 16
qualified countries for FY2004, Madagascar has the fourth largest population (16.4
million), and might have been expected to receive one of the larger MCA grants
given its population size and its per capita income ($230, second lowest among the
16 MCA countries).
For Honduras (a $215 million MCA program over five years), Nicaragua ($175
million over five years), and Georgia ($295 million over five years), the United
States has been the top bilateral donor in recent years without the MCA program, and
will likely remain in that position once the MCA grants begin to disburse. But the
MCA Compacts for Honduras and Nicaragua call for only slightly higher annual
amounts than current U.S. economic assistance provides, while Georgia’s Compact
will average only about three-fourths of the annual level of present American aid.
While these are not insignificant amounts of new resources, they are far less than
Administration officials had suggested previously.28
25 See, for example, Millennium Challenge Corporation FY2005 Budget Justification, p. 7.
Found at [http://www.mcc.gov/about_us/key_documents/index.shtml].
26 Prepared statement of Steve Radelet, Senior Fellow at the Center for Global Development,
before a hearing of the House International Relations Committee, April 27, 2005.
27 Organization for Economic Cooperation and Development (OECD), Geographical
Distribution of Financial Flows to Aid Recipients, 1999/2003: 2005 edition. p. 172.
28 For example, USAID Administrator Natsios remarked in an October 22, 2002 speech at
the American Embassy in London that “we estimate in most countries the MCA will provide
funding 5 to 10 times higher than existing levels” of U.S. assistance.

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CRS-19
In contrast, the $110 million, five-year Compact with Cape Verde represents a
substantial investment by the United States. USAID, which last provided direct
bilateral assistance to Cape Verde in the mid-1990s, does not maintain a mission
presence, allocating small amounts of aid through regional programs. The Compact’s
$22 million annual average will place the United States roughly on par with Portugal,
Cape Verde’s former colonial power, as the leading donor, and represent a one-third
increase of total development aid grants from all sources compared with figures for
2002 and 2003.29
This issue was addressed by Ambassador Danilovich during his September 27,
2005 confirmation hearing to be the MCC’s new CEO. He noted that the MCC was
“meant to create transformative programs,” and to do so he said that “future
Compacts will generally need to be larger than those signed thus far.” Ambassador
Danilovich cautioned, however, that with limited resources but larger Compacts,
fewer countries will receive funding if MCC is to achieve its transformational goal.30
Madagascar Compact. The Madagascar Compact is a four year, $110
million program, focusing on rural agriculture development and poverty reduction.
Specifically, the project has three objectives: 1) to increase land titling and land
security ($36 million); 2) to expand the financial sector and increase competition
($36 million); and 3) to improve agricultural production technologies and market
capacity in rural areas ($17 million). According to the MCC, the Compact is
designed to assist Madagascar’s rural poor, which account for 80% of the nation’s
impoverished population, and generate income by expanding opportunities to own
land, to access credit, and to gain technical training in agriculture and market
identification.
Elements of the design, negotiation, and completion of the Madagascar Compact
met several of the key criteria of the MCA process. For example, discussions
regarding the scope and purpose of the MCA grant occurred at the regional and
national level in Madagascar that included broad representation of civil society.
Management and oversight of the Compact will be handled by a new entity, MCA-
Madagascar, whose Steering Committee will include government and non-
government officials. Both of these steps underscore the “country-ownership” and
broad participatory nature of MCA programs. The Compact also includes fiscal
accountability requirements concerning audits, monitoring, and evaluation that
support the transparency concept of the MCA. While the $110 million MCA grant
will be fully obligated when the Compact enters into force, resources will be
transferred periodically following a determination that performance continues
satisfactorily. This funding plan emphasizes the MCA principles of accountability
and results.
Honduras Compact. The five-year, $215 million MCA Compact with
Honduras focuses on two objectives — rural development and transportation. The
29 Geographical Distribution of Financial Flows to Aid Recipients, 1999/2003: 2005
edition. p. 116.
30 Prepared statement of John J. Danilovich, before the Senate Committee on Foreign
Relations, September 27, 2005.

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CRS-20
rural development project, representing $72.2 million of the Compact, will assist
small and medium-size farmers enhance their business skills and to transition from
the production of basic grains to horticultural crops, such as cucumbers, peppers, and
tomatoes. According to the MCC, these vegetable crops will generate about $2,000
to $4,000 in annual income per hectare, compared with roughly $500 for basic grains.
The project intends to provide farmers with the appropriate infrastructure and
necessary training for producing and marketing these different crops. The
transportation project, totaling $125.7 million of the Compact, will improve the
major highway linking Honduran Atlantic and Pacific ports, and major production
centers in Honduras, El Salvador, and Nicaragua. Rural roads will also be upgraded,
helping farmers transport their goods to markets at a lower cost. Specific results
sought in the Compact are:
! double productivity in 15,000 hectares in rural areas
! expand access to credit for farmers by over 20%
! upgrade the major road that links Honduras with commercial centers
! upgrade about 1,500 kilometers of rural roads
Cape Verde Compact. The MCC and Cape Verde have signed a five-year,
$110 million Compact focused largely on improving the country’s investment
climate, transportation networks, and agriculture productivity. The program’s goal
is to increase the annual income in Cape Verde by at least $10 million. The Compact
evolves around three projects:
! Private Sector Development — with $7.2 million and additional
participation with the International Finance Corporation, the project
aims to remove constraints to private sector investment.
! Infrastructure — the project will invest $78.7 million in road and
bridge construction to help link the nine inhabited islands and
improve transportation links to social services, employment
opportunities, local markets, and ports and airports.
! Watershed Management and Agriculture Support — by investing
$10.8 million to increase the collection, storage, and distribution of
rainfall water, the project hopes to increase agricultural production
and double the household income of farmers.
Nicaragua Compact. The five-year, $175 million Compact with Nicaragua
will focus on the promoting economic growth primarily in the northwestern region
of the country where potential opportunities exist due to the area’s fertile land and
nearby markets in Honduras and El Salvador. The Compact has three components:
1) to strengthen property registration ($26.5 million); 2) to upgrade primary and
secondary roads between Managua and Leon and to provide technical assistance to
the Ministry of Transportation ($92.8 million); and 3) to promote higher-profit
agriculture activities, especially for poor farmers, and to improve water supply in
support of higher-value sustainable agriculture.
Georgia Compact. The $295 million, five-year agreement with Georgia
focuses on reducing poverty and promoting economic growth in areas outside of the

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CRS-21
capital where over half the population lives in poverty. The Compact is divided into
two projects. The first and the largest component ($211.7 million) concentrates on
infrastructure rehabilitation, including roads, the north-south gas pipeline, water
supply networks, and solid waste facilities. The Enterprise Development Project
($47.5 million) will finance an investment fund aimed at providing risk capital and
technical assistance to small and medium-sized businesses, and support farmers and
agribusinesses that produce commodities for the domestic market. The program
expects to:
! reduce in the incidence of poverty by 12% in the Samtskhi-Javakheti
region;
! provide direct benefits to 500,000 people and indirectly benefit over
25% of Georgia’s population;
! reduce the travel time by 43% to Tbilisi, the capital, from regional
areas, thereby cutting transportation costs for farmers, businesses,
and individuals needing health and other social services; and
! lower the risk of a major gas pipeline accident and improve the
reliability of heat and electricity to over one million Georgians.

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CRS-22
Table 1. Status of MCA Compacts
Population
Human
FY05 US
Compact
Compact
GNI
Country
Living Below
Development
Econ. Aid
Size
Compact Focus
Signed
per capita
$2 p/day (%)
Index Ranking1
(millions)
(millions)
- Agriculture
$110
Cape Verde
July 4, 2005
$1,770
NA
105
$1.7
- Transport/roads
5 years
- Private sector
- Infrastructure/gas
$295
Georgia
Sept. 12, 2005
$1,040
15.7%
100
$87.6
- Transport/roads
5 years
- Agriculture/business
$215
-Agriculture
Honduras
June 13, 2005
$1,030
44.0%
116
$22.6
5 years
-Transport/roads
- Land titling
$110
Madagascar
April 18, 2005
$300
85.1%
146
$39.1
- Financial sector
4 years
- Agriculture
- Land titling
$175
Nicaragua
July 14, 2005
$790
79.9%
112
$40.7
- Transport/roads
5 years
- Agriculture
Sources:
Population Living Below $2 Per Day — data from the World Bank, World Development Indicators, 2005; Gross National Income per capita — 2004 data
from the World Bank, World Development Indicators On-Line, 2005. Human Development Index Rank — from UNDP, Human Development Report, 2005.
U.S. Economic Aid — Department of State. MCA Compact information — Millennium Challenge Corporation.
1. The Human Development Index (HDI) is compiled by the U.N. Development Program and is published annually in the UNDP Human Development
Report. It is a composite index that measures the average achievements in a country in three basic dimensions of human development: a long and healthy
life, as measured by life expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross enrolment ratio for primary, secondary
and tertiary schools; and a decent standard of living, as measured by GDP per capita in purchasing power parity (PPP) US dollars. The most recent report
(2005) evaluates 177 countries, with number 1 having the best HDI and number 177 scoring the worst in the Index.

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CRS-23
“Threshold” Countries and U.S. Assistance
In order to encourage non-qualifying countries to improve in weak areas, the
United States will help governments that are committed to reform to strengthen
performance so that they would be more competitive for MCA funding in future
years. Congress provided in authorizing legislation that not more than 10% of MCA
appropriations ($99.4 million in FY2004) could be used for such purposes, stating
that the funding could be made available through USAID. The MCC set aside up to
$40 million for countries that just missed qualifying for FY2004 funding and projects
an additional $90 million for FY2005, subject to the quality of submitted proposals.31
The Corporation has made two announcements regarding the selection of
Threshold Countries. On September 30, the Corporation named seven participants:
Albania, East Timor, Kenya, Sao Tome and Principe, Tanzania, Uganda, and Yemen.
Five weeks later, on November 8, the MCC added six more nations for FY2005:
Burkina Faso, Guyana, Malawi, Paraguay, the Philippines, and Zambia. According
to the Threshold Program Policy guidance issued by the Corporation,32 the program
will assist countries make policy reforms and institutional changes in areas where
they failed to meet the MCA performance criteria. In order to qualify for Threshold
Program FY2004 assistance, countries must have submitted by January 31, 2005,
concept papers identifying:
! where and why the country failed to pass specific indicators;
! proposals for policy, regulatory, or institutional reforms that would
improve the country’s performance on these indicators; and
! types of assistance, over a two-year maximum period, required to
implement these reforms.
If the Corporation, in consultation with USAID, determines that the concept paper
shows sufficient commitment to reform and a promise of success, the country will
prepare a Threshold Country Plan that specifically establishes a program schedule,
the means to measure progress, and financing requirements, among other
considerations. USAID is charged with overseeing the implementation of Threshold
Country Plans, including working with countries to identify appropriate
implementing partners such as local, U.S., and international firms; NGOs; U.S.
government agencies; and international organizations. Like regular MCA Compacts,
funding is not guaranteed for each country selected for the Threshold Program, but
will be based on the quality of the Country Plan.
31 Initially, assistance for Threshold countries was authorized only for FY2004. The
FY2005 Foreign Operations Appropriations (Division D of P.L. 108-447, the Consolidated
Appropriations Act for FY2005, makes 10%, or $149 million of the new appropriation
available Threshold assistance. H.R. 4014, as introduced on October 7, 2005, would make
the 10% set-aside for threshold programs permanent.
32 Found at [http://www.MCC.gov].

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CRS-24
The MCC signed the first Threshold Agreement with Burkina Faso on July 22,
2005. The $12.9 million plan is designed to improve girls’ primary education,
targeting areas of the country with the lowest primary completion rates. Although
Burkina Faso “passed” enough performance indicators to qualify for a regular MCA
program in FY2005, the Corporation’s Board did not select the country, presumably
because its scores on girls’ primary education completion and days to start a business
fell significantly below the median level.
Role of USAID and the Future of Agency Programs in MCA
Countries
As noted above, how USAID would participate in the MCA initiative has been
a continuing concern of Congress and various policy analysts. Legislation
authorizing the MCC requires the Corporation’s CEO to coordinate with USAID and
directs the Agency to ensure that its programs play a primary role in helping
candidate countries prepare for MCA consideration. Corporation and USAID
officials have said there will be close collaboration between the two entities, although
the precise nature of the relationship has yet to be made public. USAID maintains
missions in 14 of the 17 eligible countries and might be expected to support MCC
programs, through contracting, procurement, and monitoring tasks.
Another question is how USAID will adjust its own programs in MCA
countries, especially where the Agency maintains relatively small activities in
relation to other donors. Since the goal is to provide resources that will make MCA
programs among the largest aid operations in a country, it was anticipated that
USAID spending would fall well below amounts provided through MCC Compacts.
For example, in Mongolia, where U.S. aid programs have totaled $10-$12 million
annually in recent years, the United States was the fourth largest bilateral donor in
2002, representing less than a quarter of the size of Japan’s economic aid
disbursements. In Ghana, Senegal, and Sri Lanka, USAID maintains larger programs
but spends far less than other countries and multilateral agencies. But in the case of
the first Compacts for Madagascar, Honduras, and Nicaragua, the MCA grants are
only somewhat higher on a per-year average ($28 million for Madagascar, $43
million for Honduras, and $35 million for Nicaragua) than USAID’s “core”
economic aid programs (about $20 million for Madagascar, $34 million for
Honduras, and $34 million for Nicaragua). For Georgia, the Compact’s average level
of $59 million is well below USAID’s $86 million allocation for FY2005.
Like other issues involving USAID, this question remains under review.
USAID Administrator Natsios told the House Appropriations Committee on May 9,
2004 that the Agency would not withdraw from or cut programs in MCA countries,
but would not increase spending either. He said, however, that USAID would work
to ensure that its programs operate in an integrated way with MCA-funded activities.
The first test could come in Madagascar where the MCA Compact focuses on
rural agriculture, land tenure, and the financial sector, with an anticipated outcome
of protecting the country’s fragile ecosystem. USAID’s current program is largely
targeted on preventing sexually transmitted infections and HIV/AIDS, strengthening
health services, improving the nation’s governance capacity, conserving

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CRS-25
Madagascar’s biologically diverse forest ecosystems, and promoting agriculture
market development and trade. The latter two objectives appear to be consistent with
the MCA Compact. Adjustments to USAID’s program could be made in the future,
however, as the Agency undertakes a review of its strategic goals now that
Madagascar entered into an MCA program. Similar outcomes could occur in other
MCA Compact countries.
Funding Issues — Previous and in the 109th Congress
As mentioned above, Congress appropriated $994 million for FY2004 MCC
programs and an additional $1.488 billion for FY2005. The enacted appropriation
for FY2005 is 40% below the President’s $2.5 billion request. The MCC
recommendation was by far the largest increase sought by the Administration in the
Foreign Operations appropriations proposal and viewed by many observers as one of
the most vulnerable items in an increasingly difficult budget environment. In earlier
congressional action, House and Senate Budget Committees (H.Con.Res. 393 and
S.Con.Res. 95) recommended reductions in international affairs spending, suggesting
that much of the proposed cuts could be achieved by trimming back the MCC
request. Legislation authorizing appropriations for the MCC reported by the Senate
Foreign Relations Committee (S. 2144) would have reduced the level to $2 billion.
Foreign Operations appropriation bills passed in both the House and Senate
(H.R. 4818) made substantial reductions to the President’s MCC request for FY2005.
The bill, as approved by the House, reduced by half the President’s $2.5 billion
proposal. In cutting the MCC proposal, the House Appropriations Committee noted
that its decision resulted solely from the constrained budget environment in FY2005
and the need to address other Administration and Congressional priorities. The
executive branch, in its Statement of Administration Policy on H.R. 4818, expressed
its “disappointment” over the level of MCC funding and urged Congress to increase
resources. During floor debate on July 15, the House defeated (41-379) an
amendment by Representative Paul to eliminate all MCC appropriations.
The House Committee, in its report on H.R. 4818, also expressed concern over
Corporation plans to enter into multi-year Compacts without committing total
funding for these programs in the year the Compact is signed. This, the Committee
believed, would obligate future Congresses to fund prior year contracts.
Consequently, the bill required the MCC to only sign Compacts for which complete
funding was available from existing appropriations. The House Committee also
recommended that Compacts be limited to a three to four year period rather than a
three to five year duration envisioned by the MCC.
The Senate measure — also H.R. 4818, as amended to incorporate the text of
S. 2812, proposed a more significant cut to the President’s MCC request — to $1.12
billion. Despite the reduction, the Senate Appropriations Committee noted its strong
support for the program.
Following strong pressure from the White House to increase MCC funding
above House and Senate-passed levels, conferees settled on $1.5 billion for the MCC
in FY2005, adjusted downward to $1.488 billion by an across-the-board rescission

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CRS-26
requirement. Like the House bill, the conference agreement requires that the MCC
fully fund multi-year compacts selected in FY2004 and FY2005.
For some time, some Members of Congress have raised questions regarding
whether sufficient funds will be available to support MCC programs in every country
selected, especially if the Board continues its practice of selecting more countries
than meet the strict criteria. Representative Kolbe, chairman of the House Foreign
Operations Subcommittee, speculated at a May 9, 2004, hearing that based on recent
Board decisions, by 2006, as many as 40 countries might have qualified. This, he
believed, could not be fully supported with likely funding levels, and might raise
country expectations that could not be met and undermine program incentives.
MCC officials point out that qualification for the program does not mean that
a government will receive funding. That decision will be based on the quality of the
Compact proposals and it is possible that the Corporation will not finalize
agreements with all eligible countries. Nevertheless, the Corporation’s CEO Paul
Applegarth acknowledged the funding dilemma for future MCC operations at a
Senate Foreign Relations Committee hearing on October 5, noting that the sum of
proposals received thus far totaled $4.2 billion.
A March 2004 GAO report estimated that the MCC could adequately fund 8-13
Compacts with an appropriation of $3.5 billion (the combined FY2004 enacted and
FY2005 requested amounts). This suggests, that even if Congress had fully funded
the FY2005 proposal, the Corporation would not be able to support programs in all
17 countries approved for FY2004 and FY2005. With $1 billion less than the
assumption used by GAO in its assessment, the MCC may face increasing difficulties
funding Compacts of a sufficient size that will have a meaningful impact on a
country’s economic growth and poverty reduction goals. This may lead to further
congressional examination of the Board’s selection process and consideration of
ways to limit the number of countries selected in the future.
MCA Request and Congressional Action for FY2006. The
Administration sought a $3 billion appropriation for FY2006, a level that was
criticized for being both too small and too large. Some argued that given the
heightened budget pressures and proposed reductions for many domestic programs,
coupled with the fact that the MCC spent only $4 million of the nearly $2.5 billion
in existing appropriations, a request for roughly double the amount provided in
FY2005 was not warranted. Others, however, noted that President Bush pledged an
MCA funding level of $5 billion by FY2006 when he announced the initiative in
March 2002, and believe the Administration should stick with its promise regardless
of congressional reductions the past two years. The MCC called its $3 billion budget
proposal a realistic level given prior congressional actions and competing resource
demands.
Countering the argument that the Corporation has spent only a fraction of its
resources, MCC officials say that program proposals received thus far total more than
$3 billion, not including Morocco (the largest eligible country), and will exhaust
available resources by early 2006. The Corporation, in its FY2006 budget
justification to Congress, estimated that it would sign 18 Compacts with low-income
countries using FY2004-FY2006 funds, totaling just over $4 billion, or an average

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CRS-27
Compact size of nearly $225 million. The MCC budget assumptions also included
four new Compacts in FY2006 with low-middle income countries which become
eligible in FY2006 to compete for MCA grants. These costs would add $680 million
or an average of $170 million per Compact. The remaining $800 million would be
divided among amendments to earlier Compacts ($300 million), Threshold country
programs ($270 million), and administrative and related expenses (over $200
million).
These MCA budget projections appear to assume that all, or nearly all eligible
low-income countries will sign Compacts, and that four of the 32 new lower-middle
income nations will reach an MCA agreement by the end of FY2006.33 If so, MCA
financed programs could absorb the total $4.7 billion budgeted for Compacts,
FY2004-2006, but only if subsequent Compacts are of the size of the Honduras and
Georgia Compacts and significantly larger in dollar terms than the Madagascar
program.
Implications for the FY2007 budget are also unclear. Because a country must
complete one MCA program before applying for a second, none of the 22 potential
Compact countries assumed in the MCC budget documents would be eligible for a
subsequent grant until FY2008. Given that only one new country was added to the
eligible list in FY2005 and six in FY2006, a possible FY2007 funding level of
between $3 and $5 billion would suggest several possible scenarios: a surge (unlike
FY2005 and FY2006) in the number of newly eligible countries, possibly including
the elevation of Threshold countries to full MCA eligible status; significant
amendments to existing Compacts increasing their size; or the creation of a large
funding reserve that could be utilized in subsequent years as current MCA countries
complete programs and apply for new grants.
Congressional Action. The House voted on June 28, 2005, to reduce the
FY2006 MCA funding level to $1.75 billion (H.R. 3057). The Appropriation
Committee’s report on the legislation said that the reduction stemmed solely from the
constrained budget environment and the need to allocate resources to other
Presidential and congressional priorities. In order to operate in FY2006 with reduced
resources, the Committee recommended that the Corporation not use funds for
amending and increasing existing Compacts, but to maximize the number of new
compacts with available appropriations.
The Senate Appropriations Committee recommended on June 30 (also H.R.
3057) a slightly higher MCA appropriation, providing $1.8 billion. The Committee,
in its report (H.Rept. 109-96), also said that the constrained budget allocation was
one reason for the reduced appropriation. The Senate panel, however, further noted
that the MCC had obligated less than $34 million of the nearly $2.5 billion in
existing funds, and that the average value to the two signed Compacts was about one-
half of what the Corporation stated in its budget justification. The Committee further
expressed concern about coordination and consistency with other U.S. aid programs
33 In fact, that number is likely to be two at the most. The Board chose only three LMICs
in the FY2006 round, including Cape Verde which signed a Compact in July 2005 as a low-
income country eligible in FY2004.

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CRS-28
in MCA countries, and directed the Secretary of State to report on these issues,
including an assessment of whether MCA programs were duplicative of USAID or
other aid activities in Compact countries. The Senate approved the $1.8 billion
appropriation when it passed the FY2006 Foreign Operations funding measure on
July 20.
As enacted and signed by the President on November 14, 2005 (H.R. 3057; P.L.
109-102), the Foreign Operations Appropriations provides $1.77 billion for the
MCC, representing a 19% increase over FY2005 levels, but 41% less than the
President requested.
Pending Authorizing Legislation
While there is no “sunset” provision in the Millennium Challenge Act of 2003,
the initial MCA statute only authorized appropriations through FY2005. Although
funding for FY2006 and beyond is not necessarily contingent on an authorization —
annual Foreign Operations appropriation bills routinely waive the requirement of
authorization of foreign aid programs — Representatives Hyde and Lantos, Chairman
and the ranking Member of the House International Relations Committee, introduced
H.R. 4014 on October 7, 2005, that among other things, would authorize the MCA
through FY2008. Beyond this, the bill further proposes a number of policy
modifications to the original legislation and to the operations of the Corporation.
Modifies the Criteria for Determining the Income Grouping of
Countries. Instead of classifying a country as low-income, lower middle-income,
or above the lower middle-income range based on the most current per capita income
figures released annually by the World Bank, H.R. 4014 proposes to use an average
of the three most current years for making such determinations. This would largely
have the affect of avoiding an abrupt reclassification of a country from one income
group to another. Cape Verde, for example, moved from the low-income group to
the lower middle-income group in FY2005, at which time it could no longer
compete, and remains in this higher income category for FY2006 where it will face
stiff competition from countries with nearly twice the per capita income. Under the
three-year average formula recommended in H.R. 4014, Cape Verde would remain
in the low-income group at least through FY2006. Likewise, several countries such
as South Africa, Russia, and Turkey, that previously fell in the lower middle-income
group and were assumed to be part of the FY2006 competition, are not because of a
sharp rise in per capita income. Had the MCC applied a three-year average, each
would have been a candidate country for FY2006.
Strengthens Local Country Input in Compact Development. A
continuing concern expressed in public meetings on MCA implementation is that
Compacts have been developed with broad national participation of civil society.
H.R. 4014 would require each Compact to describe how the government met local
input requirements for the creation of the Compact and how local input will be
reflected in Compact projects. The bill further adds a specific need for national
legislatures of eligible countries to be consulted during the Compact development
phase.

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CRS-29
Assists Countries in the Preparation of Compacts. One reason for the
delay in finalizing Compacts with eligible countries has been the lack of country
capacity to draft solid proposals. Although original MCA legislation authorized
grants for the purpose of aiding Compact development, H.R. 4014 would expand
such assistance by allowing the MCC to provide its own staff on a temporary basis
for such purposes.
Sets a More Precise Timetable for Compact Preparation and
Signing. A key frustration by many lawmakers during the early period of MCA
implementation has been long delays in the submission of program proposals and the
actual completion of Compact documents. Although not mandating a specific
schedule, H.R. 4014 expresses a sense of Congress that countries should be
encouraged to submit proposals within a year of their selection and that it should be
a goal to enter into Compacts within two years of their eligible status.
Allows Compacts to Cover a Longer Period. Currently, Compacts
cannot last for more than five years. H.R. 4014 would permit Compacts that cannot
be completed in that period to be approved for up to 10 years.
Permits Multiple Compacts. Under current law, a country cannot maintain
more than one Compact. H.R. 4014 would allow the Corporation to enter into two
concurrent Compacts with an eligible country, so long as the country is making
“considerable and demonstrable progress” in meeting the terms of the original
Compact. Likewise, when a country applies for a subsequent Compact, the MCC
must determine that the country has “substantially met” the goals of prior Compacts.
Expands Consultation Requirements with Congress. H.R. 4014
includes several provisions that would require more extensive consultation with
Congress, especially on matters for which policy changes are proposed. For example,
when negotiating concurrent or subsequent Compacts, the MCC would need to notify
Congress that the country had met the requirements of existing or previous
Compacts. In addition, the bill would require the Corporation to consult and provide
copies of Compacts to congressional committees 15 days prior to Board meetings to
approve Compacts and 15 days prior to signing a Compact. H.R. 4014 further
expands information the MCC must supply in its annual report.
Strengthens Transparency Requirements. The initial concept of the
MCA program was to make the selection process and MCC operations an open and
transparent system. H.R. 4014 builds on existing legislation by requiring that the
MCC post the texts of Compacts on its website; that the Corporation publish in the
Federal Register its criteria for deciding whether or not to terminate assistance to a
country with which a Compact is in effect; and by making the MCC and its staff
subject to the Freedom of Information Act.
Recommends Larger Staff. A concern voiced by many has been that the
MCC, with a 200-staff target, would be too small to adequately conduct oversight
and monitoring of Compacts. Compared with other U.S. and international foreign
aid agencies, the ratio of staff to funds-managed is very low for the Corporation.
H.R. 4014 recommends, as a sense of Congress, that the MCC maintain a staff of
about 300.

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CRS-30
Table 2. MCA Candidate, Eligible, and Threshold Countries —
FY2004
Criteria: IDA-eligible, per capita income $1,415 and below, and not prohibited from
receiving other U.S. economic assistance.
Eligible Countries are in Bold.
Threshold Countries are followed with (TC)
Latin
Africa
Income*
East Asia/Pacific
Income*
Income*
America
Angola
$660
East Timor (TC)
$430
Bolivia
$940
Benin
$390
Indonesia
$680
Guyana
$840
Burkina Faso
$220
Kiribati
$810
Haiti
$440
Cameroon
$560
Laos
$310
Honduras
$920
Cape Verde
$1,290
Mongolia
$440
Nicaragua
**
Chad
$220
Papua New Guinea
$580
Comoros
$390
Solomon Islands
$570
Congo, Dem Rep of
$90
Tonga
$1,410
Congo, Rep of
$700
Vanuatu
$1,080
Eritrea
$160
Vietnam
$430
Ethiopia
$100
Gambia
$280
South Asia
Income*
Mid-East
Income*
Ghana
$270
Afghanistan
**
Djibouti
$900
Guinea
$410
Bangladesh
$360
Yemen (TC)
$490
Kenya (TC)
$360
Bhutan
$590
Lesotho
$470
India
$460
Madagascar
$240
Nepal
$230
Malawi
$160
Pakistan
$420
Mali
$240
Sri Lanka
$840
Mauritania
$340
Mozambique
$210
Eurasia
Income*
Europe
Income*
Niger
$170
Armenia
$790
Albania(TC)
$1,380
Nigeria
$290
Azerbaijan
$650
Bosnia
$1,270
Rwanda
$230
Georgia
$720
Sao Tome &
$290
Kyrgyz Rep.
$290
Principe (TC)
Senegal
$470
Moldova
$460
Sierra Leone
$140
Tajikistan
$180
Tanzania (TC)
$280
Togo
$270
Uganda (TC)
$240
Zambia
$330
* Gross National Income, dollars per capita, 2002. World Bank Annual Report, 2003.
** Precise data unavailable.

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CRS-31
Table 3. MCA Candidate, Eligible, and Threshold Countries —
FY2005
Criteria: Per capita income $1,465 and below, and not prohibited from receiving
other U.S. economic assistance.
Eligible Countries are in Bold.
Threshold Countries are followed with (TC)
Latin
Africa
Income*
East Asia/Pacific
Income*
Income*
America
Angola
$740
China
$1,100
Bolivia
$890
Benin
$440
East Timor (TC)
$430
Guyana(TC)
$900
Burkina Faso (TC)
$300
Indonesia
$810
Haiti
$380
Cameroon
$640
Kiribati
$880
Honduras
$970
Chad
$250
Laos
$320
Nicaragua
$730
Comoros
$450
Mongolia
$480
Paraguay(TC
$1,100
Congo, Dem Rep
$100
Papua New Guinea
$510
Congo, Rep of
$640
Philippines (TC)
$1,080
Equatorial Guinea
**
Solomon Islands
$600
Eritrea
$190
Tuvalu
**
Ethiopia
$90
Vanuatu
$1,180
Gambia
$310
Vietnam
$480
Ghana
$320
Guinea
$430
South Asia
Income*
Mid-East
Income*
Kenya (TC)
$390
Afghanistan
**
Djibouti
$910
Lesotho
$590
Bangladesh
$400
Egypt
$1,390
Madagascar
$290
Bhutan
$660
Iraq
**
Malawi (TC)
$170
India
$530
Morocco
$1,320
Mali
$290
Nepal
$240
Yemen (TC)
$520
Mauritania
$430
Pakistan
$470
Mozambique
$210
Sri Lanka
$930
Niger
$200
Nigeria
$320
Eurasia
Income*
Europe
Income*
Rwanda
$220
Armenia
$950
Sao Tome &
$320
Azerbaijan
$810
Principe (TC)
Senegal
$550
Georgia
$830
Sierra Leone
$150
Kyrgyz Rep.
$330
Swaziland
$1,350
Moldova
$590
Tanzania (TC)
$290
Tajikistan
$190
Togo
$310
Turkmenistan
$1,120
Uganda (TC)
$240
Ukraine
$970
Zambia (TC)
$380
* Gross National Income, dollars per capita, 2003. World Bank Annual Report, 2004.
** Precise data unavailable.

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CRS-32
Table 4A. MCA Low-Income Candidate, Eligible, and Threshold
Countries — FY2006
Criteria: Per capita income $1,575 and below, and not prohibited from receiving
other U.S. economic assistance.
Eligible Countries are in Bold.
Threshold Countries are followed with (TC)
Africa
Income*
East Asia/Pacific
Income*
Latin America
Income*
Angola
$1,030
China
$1,290
Bolivia
$960
Benin
$530
East Timor
$550
Guyana (TC)
$990
Burkina Faso
$360
Indonesia (TC)
$1,140
Haiti
$390
Cameroon
$800
Kiribati
$970
Honduras
$1,030
Chad
$260
Laos
$390
Nicaragua
$790
Comoros
$530
Mongolia
$590
Paraguay (TC)
$1,170
Congo, Dem Rep of
$120
Papua New Guinea
$580
Congo, Rep of
$770
Philippines (TC)
$1,170
Djibouti
$1,030
Solomon Islands
$550
Eritrea
$180
Vanuatu
$1,340
Ethiopia
$110
Vietnam
$550
Gambia
$290
Ghana
$380
Guinea
$460
South Asia
Income*
Mid-East
Income*
Guinea-Bissau
$160
Afghanistan
**
Egypt
$1,310
Kenya (TC)
$460
Bangladesh
$440
Iraq
**
Lesotho
$740
Bhutan
$760
Morocco
$1,520
Liberia
$110
India
$620
Yemen
$570
Madagascar
$300
Nepal
$260
Malawi (TC)
$170
Pakistan
$600
Mali
$360
Sri Lanka
$1,010
Mauritania
$420
Mozambique
$250
Eurasia
Income*
Niger
$230
Armenia
$1,120
Nigeria
$390
Azerbaijan
$950
Rwanda
$220
Georgia
$1,040
Sao Tome&Principe
$370
Kyrgyz Rep. (TC)
$400
(TC)
Senegal
$670
Moldova (TC)
$710
Sierra Leone
$200
Tajikistan
$280
Tanzania
$330
Turkmenistan
$1,340
Togo
$380
Ukraine (TC)
$1,260
Uganda (TC)
$270
Zambia (TC)
$450
* Gross National Income, dollars per capita, 2004. World Bank, World Development Indicators, On
Line, 2005.
** Precise data unavailable.

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CRS-33
Table 4B. MCA Lower Middle-Income Candidate and Eligible
Countries — FY2006
Criteria: Per capita income between $1,575 and $3,255, and not prohibited from
receiving other U.S. economic assistance.
Eligible Countries are in Bold
Threshold Countries are followed with (TC)
Africa
Income*
East Asia/Pacific
Income*
Latin America
Income*
Cape Verde
$1,770
Fiji
$2,690
Brazil
$3,090
Namibia
$2,370
Marshall Islands
$2,370
Colombia
$2,000
Swaziland
$1,660
Micronesia
$1,990
Dominican Rep
$2,080
Samoa
$1,860
Ecuador
$2,180
Thailand
$2,540
El Salvador
$2,350
Tonga
$1,830
Guatemala
$2,130
Tuvalu
**
Jamaica
$2,900
Peru
$2,360
Suriname
$2,250
South Asia
Income*
Mid-East
Income*
Maldives
$2,510
Algeria
$2,280
Jordan (TC)
$2,140
Tunisia
$2,630
Eurasia
Income*
Europe
Income*
Belarus
$2,120
Albania
$2,080
Kazakhstan
$2,260
Bulgaria
$2,740
Macedonia
$2,350
Romania
$2,260
* Gross National Income, dollars per capita, 2004. World Bank, World Development Indicators On
Line, 2005.
** Precise data unavailable.

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CRS-34
Table 5. MCC Performance Indicators for FY2006
Ruling Justly
Investing in People
Economic Freedom
Control of Corruption
Public Primary Education Spending as % of GDP
Inflation (must be below 15%)
Source: World Bank Institute
Sources: National governments
Source: Multiple
[http://www.worldbank.org/wbi/governance/govdat
a2002/index.html]
Voice and Accountability
Primary Girls’ Education Completion Rate
Fiscal Policy
Source: World Bank Institute
Sources: World Bank and UNESCO
Source: National governments and IMF World
[http://www.worldbank.org/wbi/governance/govdat
Economic Outlook
a2002/index.html]
Government Effectiveness
Public Expenditure on Health as % of GDP
Trade Policy
Source: World Bank Institute
Sources: National governments
Source: The Heritage Foundation, Index of
[http://www.worldbank.org/wbi/governance/govdat
Economic Freedom
a2002/index.html]
[http://www.heritage.org/research/features/index/]
Rule of Law
Immunization Rates: DPT and Measles
Regulatory Policy
Source: World Bank Institute
Sources: World Health Organization
Source: World Bank Institute
[http://www.worldbank.org/wbi/governance/govdat
[http://www.worldbank.org/wbi/governance/govdat
a2002/index.html]
a2002/index.html]
Civil Liberties
Days to Start a Business
Source: Freedom House
Source: World Bank
[http://www.freedomhouse.org/research/freeworld/
[http://rru.worldbank.org/DoingBusiness/ExploreT
2004/table2004.pdf]
opics/StartingBusiness/CompareAll.aspx]
Political Freedom
Cost of Starting a Business
Source: Freedom House
Source: World Bank
[http://www.freedomhouse.org/research/freeworld/
[http://rru.worldbank.org/DoingBusiness/ExploreT
2004/table2004.pdf]
opics/StartingBusiness/CompareAll.aspx]

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CRS-35
Table 6. Comparison of MCA Authorization Legislation
Issue
Administration
Senate (S. 925)a
House (H.R. 1950)a
Conference (H.R. 2673)
MCA oversight
Board of Directors, chaired by
Board of Directors, chaired by
Board of Directors, chaired by
Board of Directors, chaired by
Secretary of State, with
the Secretary of State, with
Secretary of State, with
Sec. of State, with Treasury,
Treasury and OMB
Treasury, USAID, USTR, and
Treasury, USTR, USAID, MCC
USTR, USAID, MCC CEO,
the MCA’s Chief Executive
CEO, and four others nominated
and four others nominated by
Officer (CEO)
by the President from a
the President that may come
Congressional list. Non-voting
from list submitted by
members include OPIC, OMB,
Congressional leaders.
Peace Corps, and TDA.
MCA organization
Independent Millennium
Independent Millennium
Independent Millennium
Independent Millennium
Challenge Corporation
Challenge Corporation whose
Challenge Corporation
Challenge Corporation
CEO reports to and be under
the direct authority and foreign
policy guidance of the
Secretary of State
MCA coordinator
CEO of Corporation
CEO “manages” the
CEO “heads” the Corporation,
CEO “manages” the
Corporation, reporting to and
reporting to the President
Corporation, reporting to and
under the direct authority and
under the direct authority and
foreign policy guidance of the
foreign policy guidance of the
Secretary of State
Board of Directors.
Interim CEO
—
—
—
Board of Directors may appoint
a confirmed U.S. Government
official to serve as interim
CEO until a CEO has been
confirmed by the Senate.
Selection of
Board of Directors
Board of Directors
CEO of Corporation
Board of Directors
countries
MCC Advisory
None
None
Nine members named by the
None
Council
CEO to advise on MCA policy,
review eligibility criteria,
evaluate the MCC, assess MCC
capabilities, and make
recommendations to the CEO.

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CRS-36
Issue
Administration
Senate (S. 925)a
House (H.R. 1950)a
Conference (H.R. 2673)
Country income
FY2004 - IDA eligible and per
FY2004 - IDA eligible
FY2004 - IDA eligible and per
FY2004 - IDA eligible and per
eligibility
capita GNI less than historical
capita GNI less than historical
capita GNI less than historical
IDA level for the year ($1,415
IDA level for the year ($1,415
IDA level for the year ($1,415
in FY2004)
in FY2004)
in FY2004)
FY2005 - per capita GNI less
FY2005 - per capita GNI less
FY2005 - per capita GNI less
FY2005 - per capita GNI less
than historical IDA level for
than historical IDA cutoff for
than historical IDA level for the
than historical IDA level for
the year ($1,465 in FY2005)
the year ($1,465 in FY2005)
year ($1,465 in FY2005)
the year ($1,465 in FY2005)
FY2006 - per capita GNI less
FY2006 - per capita GNI less
FY2006 - per capita GNI less
FY2006 - per capita GNI less
than historical IDA level for
than historical IDA cutoff for
than historical IDA level for the
than historical IDA level for
the year ($1,465 in FY2005),
the year ($1,465 in FY2005),
year ($1,465 in FY2005), plus
the year ($1,465 in FY2005),
plus low-middle income
plus, if appropriation exceeds
low-middle income countries as
plus low-middle income
countries as defined in the
$5 billion, low-middle income
defined in the World Bank
countries as defined in the
World Bank Development
countries as defined in the
Development Report ($3,035 in
World Bank Development
Report ($3,035 in FY2005)
World Bank Development
FY2005); low-middle income
Report ($3,035 in FY2005);
Report ($3,035 in FY2005);
countries capped at 20%
low-middle income countries
low-middle income countries
capped at 25%
capped at 20%
Eligible entity
None stated
A government, including a
A national government, regional
A national government,
local or regional government,
or local government, an NGO,
regional or local government,
or an NGO or private entity.
an international organization
or an NGO or private entity.
and trust funds.
Aid to “threshold”
General support
10% of MCA funds available
15% of MCA funds available
10% of MCA funds available
countries
for countries failing to qualify
for countries demonstrating a
for countries showing a
because of inadequate data or
development commitment but
commitment to MCA criteria
missing one indicator
fail to meet a sufficient number
but fail to qualify
of performance indicators
Oversight and
MCA contracts and
Disclosure in Federal Register
CEO consultation with Congress
Establishes a period of at least
reports
performance posted on the
and on the Internet of eligible
on eligibility criteria;
95 days during which Congress
Internet.
countries, programs supported,
notification 15 days in advance
will receive the list of
and performance; proposed
on grants exceeding $5 million;
“candidate countries,” the
performance indicators open to
“Compacts” with countries
eligibility criteria and
public comment; annual report
published in Federal Register
methodology for making a final
to Congress
and on the Internet; advance
selection, and the list of
notification of aid termination;
“eligible” countries (those that

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CRS-37
Issue
Administration
Senate (S. 925)a
House (H.R. 1950)a
Conference (H.R. 2673)
annual reports to Congress from
will receive MCA assistance).
the CEO and Advisory Council
Consultation with
congressional committees will
occur during this period and
the information will be
published in the Federal
Register.
“Compacts” with countries
will be reported to Congress
and published in Federal
Register.
Annual report by March 31.
Funding
FY2004 - $1.3 billion
FY2004 - $1 billion
FY2004 - $1.3 billion
Such sums as may be necessary
FY2005 - no decision
FY2005 - $2.3 billion
FY2005 - $3 billion
for FY2004 and FY2005.
FY2006 - $5 billion
FY2006 - $5 billion
FY2006 - $5 billion
a. The Senate position is based on S. 925, the Foreign Affairs Act, Fiscal Year 2004, as amended, but not passed during debate on July 9 and 10, 2003. The House position is taken
from H.R. 1950, an omnibus foreign policy authorization measure which passed the House on July 16, 2003.

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