Order Code RL32427
Millennium Challenge Account
Updated October 8, 2008
Curt Tarnoff
Specialist in Foreign Affairs
Foreign Affairs, Defense, and Trade Division

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Millennium Challenge Account
Summary
In a speech on March 14, 2002, President Bush outlined a proposal for a major
new U.S. foreign aid initiative. The Millennium Challenge Account (MCA) is
managed by the Millennium Challenge Corporation (MCC) and provides assistance,
through a competitive selection process, to developing nations that are pursing
political and economic reforms in three areas: ruling justly, investing in people, and
fostering economic freedom.
The MCC differs in several respects from past and current U.S. aid practices:
! the competitive process that rewards countries for past and current
actions measured by 17 objective performance indicators;
! the pledge to segregate the funds from U.S. strategic foreign policy
objectives that often strongly influence where U.S. aid is spent; and
! the requirement to solicit program proposals developed solely by
qualifying countries with broad-based civil society involvement.
As announced by the President in March 2002, the initial plan had been to fund
the MCC annually at $5 billion by FY2006, but this figure has not yet been reached.
The Administration has sought a combined $12.8 billion for the MCA program,
FY2004-FY2008, while Congress appropriated $7.5 billion, or less than two-thirds
of the total sought. FY2009 funding is currently provided under the terms of a
continuing resolution (H.R. 2638/P.L. 110-329), which provides foreign aid spending
at the level in the FY2008 Consolidated Act ($1.54 billion). The resolution expires
on March 6, 2009.
Congress authorized the MCC in P.L. 108-199 (January 23, 2004). Since that
time, the MCC’s Board of Directors has selected 27 eligible countries during the
period from FY2004 through FY2008 (another, The Gambia, was suspended in 2006)
and approved 18 Compacts with Madagascar (April 2005), Honduras June 2005),
Cape Verde (July 2005), Nicaragua (July 2005), Georgia (September 2005), Benin
(February 2006), Vanuatu (March 2006), Armenia (March 2006), Ghana (August
2006), Mali (November 2006), El Salvador (November 2006), Mozambique (July
2007), Lesotho (July 2007), Morocco (August 2007), Mongolia (September 2007),
Tanzania (September 2007), Burkina Faso (June 2008), and Namibia (July 2008).
MCA implementation matters continue to unfold, including the relationship of
MCA and USAID, sectors chosen, and the impact of rising costs on country
programs. A growing question raised by some Members of Congress concerns the
level of funding to support MCC programs. Some fear that insufficient funds might
force the MCC to reduce the number of recipients or the size of the grants. Others,
however, support reductions in MCC budget requests, believing that the slower-than-
anticipated pace of Compact agreements means that the Corporation has enough
resources.
This report will be updated as events unfold.

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Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
MCA Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
MCC Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Selection of Candidate Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Country Selection Criteria and Methodology . . . . . . . . . . . . . . . . . . . . . . . . 5
Selecting Eligible Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Country Selection — FY2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
MCA Compacts and Program Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Compact Descriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
“Threshold” Countries and Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Select Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Role of USAID and the Future of Agency Programs in MCA Countries . . 19
Compact Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Compact Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Speed of Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Compact Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Rising Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Funding Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
MCA Request and Congressional Action for FY2009 . . . . . . . . . . . . 24
Authorizing Legislation and MCC Reform . . . . . . . . . . . . . . . . . . . . . . . . . 25
List of Tables
Table 1. Compact-Eligible Countries: FY2008 . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 2. MCA Appropriations: FY2004-FY2009 . . . . . . . . . . . . . . . . . . . . . . . . 24
Table 3. Status of MCA Compacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Table 4A. MCA Low-Income Candidate Countries — FY2009 . . . . . . . . . . . . 28
Table 4B. MCA Lower-Middle-Income Candidate Countries — FY2009 . . . . 29
Table 5. MCC Performance Indicators for FY2008 . . . . . . . . . . . . . . . . . . . . . . 30

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Millennium Challenge Account
Most Recent Developments
FY2009 funding for the MCC is currently provided under the terms of a
continuing resolution (H.R. 2638/P.L. 110-329), which allows foreign aid spending
as provided in the FY2008 Consolidated Appropriations Act (P.L. 110-161). The
resolution expires on March 6, 2009. The MCC received $1.54 billion in the FY2008
Consolidated Appropriations Act.
On September 18, 2008, 38 Members of Congress signed a letter addressed to
House Appropriations Committee leadership supporting an FY2009 MCC funding
level at least at the subcommittee-passed level of $1.54 billion.
On September 17, 2008, the MCC Board discussed “the possibility” of
providing an additional $100 million to the existing $295 million Compact with
Georgia. The Board was responding to a September 4, 2008, $1 billion
Administration aid initiative for Georgia, of which the MCC was a component.
On July 17, 2008, the Senate Appropriations Committee reported S. 3288, the
FY2009 State/Foreign Operations appropriations (S.Rept. 110-425), providing $254
million to the MCC, a cut of 86% from the Administration request, and $1.3 billion
less than FY2008. On July 16, 2008, the House State/Foreign Operations
Subcommittee approved its version of the FY2009 appropriations, providing $1.5
billion for the MCC, a 33% cut from the Administration request and the same level
as in FY2008.
Overview
In a speech on March 14, 2002, President Bush outlined a proposal for a new
program that would represent a fundamental change in the way the United States
invests and delivers economic assistance. The MCA is based on the premise that
economic development succeeds best where it is linked to free market economic and
democratic principles and policies, and where governments are committed to
implementing reform measures in order to achieve such goals. The MCA concept
differs in several fundamental respects from past and current U.S. aid practices:
! the competitive process that rewards countries for past actions
measured by 17 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.

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CRS-2
The proposal also differed in the size of the original $5 billion commitment, an aim
never even approximately met.
Congress authorized the new initiative in January 2004 (Division D of P.L. 108-
199) and has closely followed its implementation. As the program evolves, the 111th
Congress, like its predecessor, will continue to debate MCA funding issues and
conduct oversight hearings on operations of the Corporation.
MCA Background1
The Millennium Challenge Account (MCA), managed by a new Millennium
Challenge Corporation (MCC), provides assistance, through a competitive selection
process, to developing nations that are pursing political and economic reforms in
three areas:
! Ruling justly — promoting good governance, fighting corruption,
respecting human rights, and adhering to the rule of law.
! Investing in people — providing adequate health care, education,
and other opportunities promoting an educated and healthy
population.
! Economic freedom — fostering enterprise and entrepreneurship and
promoting open markets and sustainable budgets.
Country selection is based largely, but not exclusively, on a nation’s record
measured by 17 performance indicators related to the three categories, or “baskets.”
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 5 below for a complete list of the 17
performance indicators.) Administration officials, since announcing the MCA
initiative in 2002, have said that the selection process would be guided by, but not
necessarily bound to the outcomes of the performance indicators. Missing or old
data, general trends, and recent steps taken by governments might also be taken into
account when annual decisions are 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 MCA criteria will be funded. It is expected that successful
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, by Larry Nowels.

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CRS-3
Compacts will support programs lasting three to five years, providing a level of
resources roughly equivalent to the largest providers of assistance in the country. In
most cases, this will likely result in a significant increase of U.S. economic assistance
to MCA participant countries.
To manage the new initiative, the Administration proposed and Congress
authorized the creation of a Millennium Challenge Corporation (MCC), an
independent government entity separate from the Departments of State and the
Treasury and from the U.S. Agency for International Development (USAID). The
MCC plans for an eventual staff of about 300. It is led by a CEO confirmed by the
Senate. The current CEO is Ambassador John Danilovich.2 A Board of Directors
oversees operations of the MCC and makes the country selections. It is chaired by
the Secretary of State and composed of the Secretary of the Treasury, the USAID
Administrator, the U.S. Trade Representative, the Corporation’s CEO, and four
individuals from the private sector drawn from lists of proposed nominees submitted
by Congressional leaders.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 was placed
outside the formal U.S. government foreign aid structure, it would lead to further
fragmentation of policy development and consistency. Some believed that USAID,
the principal U.S. aid agency, should manage the MCA, while others said that the
MCA should reside in the State Department where more U.S. foreign policy entities
have been integrated in recent years. At least, some argued, the USAID
Administrator should be a member of the MCC Board, which had not been proposed
in the initial Administration request.
It appears that the MCC’s status will remain unchanged under Secretary Rice’s
realignment of foreign aid authorities, announced on January 19, 2006. Henrietta
Holsman Fore, the USAID Administrator, also serves concurrently in the newly
created State Department position of Director of Foreign Assistance. While gaining
policy and budget authority over nearly all USAID and State Department foreign aid
programs, the Director plays a more limited role in other agency activities, by
developing an overall U.S. government development strategy and providing
“guidance” to foreign aid programs delivered through other agencies like the MCC.
2 Replacing Paul Applegarth who resigned on August 8, 2005.
3 The private sector Board members are Alan Patricof, co-founder of a venture capital
corporation; Lorne Craner, President of the International Republican Institute; former
Senate Majority Leader William Frist; and Kenneth Hackett, President and CEO of Catholic
Relief Services. The latter is a reappointment, permitted a two-year term; the others are
serving their first three-year terms.

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CRS-4
MCC Implementation
From the time the MCC Board of Directors held its initial meeting to establish
the program and agree to Corporation by-laws on February 2, 2004, procedures and
policies have continued to evolve. Program implementation moves chronologically
through a number of steps: candidate countries are identified, criteria are formulated,
Compact and threshold-eligible countries are selected, programs are developed and
proposed, and those approved are funded and carried out. Elements in this process
are discussed below.
Selection of Candidate Countries
The selection of initial candidate countries is fairly straightforward and based
on the authorizing statute. Countries must fall into specific economic categories
determined by their per capita income status (as defined and ranked by the World
Bank). During the first year of the program, in FY2004, MCA participation was
limited to the poorest nations that were eligible to borrow from the World Bank’s
International Development Association; there were 74 of these. The list expanded
in FY2005 to include all low-income countries (adding another 13 nations).
Beginning in FY2006 and beyond, all low- and lower- middle-income countries (with
per capita incomes between $1,785 and $3,705 in FY2009) compete for MCC
resources (a total of 93 countries in FY2009). However, lower-middle-income
countries may receive only a quarter of MCA assistance in any year.
In addition to the income ceiling, countries may be candidates only if they are
not statutorily prohibited from receiving U.S. economic assistance. In FY2009, 11
countries were excluded for this reason. Most had been barred in prior years as well.4
One, Mauritania, excluded in FY2009 because of a military coup, had been selected
as the one new threshold program-eligible country in FY2008 and will thereby lose
its eligibility.
In August 2008, the MCC transmitted to Congress its annual notification of
candidate countries, listing 64 low-income countries and 29 lower-middle-income
countries (See Table 4A and Table 4B). There was one new entry to the low-income
candidates: Kosovo, now an independent state. Bosnia and Herzegovina is a new
entry in the lower-middle-income group, and Thailand returns following democratic
elections. Georgia and Vanuatu have moved from low-income to lower-middle-
income status. Three previously lower-middle-income countries are no longer
candidates: Jamaica, Belarus, and Suriname have graduated to middle-income status.
4 Various types of aid restrictions applied to these countries. For several — Mauritania,
Sudan, Cote d’Ivoire, — U.S. aid was blocked because an elected head of government had
been deposed by a military coup. For Uzbekistan, legislation banned assistance to the
central government. Aid restrictions imposed on nations not cooperating in counter-
narcotics efforts (Burma), that are on the terrorist list (Sudan, Syria, North Korea, Iran), or
in arrears on debt owed the United States (Syria, Sudan, Zimbabwe) also applied.
Notwithstanding these restrictions, each country remained eligible for humanitarian
assistance from the United States.

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CRS-5
Country Selection Criteria and Methodology
The choice of criteria on which to base the eligibility of countries for threshold
and Compact programs is one of the most important elements in MCC operations
(See Table 5 for Performance Indicators). They are a key statement of MCC
development priorities and ultimately determine which countries will receive U.S.
assistance. Perhaps of equal significance, the current indicators themselves have
become prominent objectives of some developing countries in what Board CEO
Danilovich has called the “MCC effect.”5 Countries seeking eligibility are moving
on their own to enact reforms and take measures that would enable them to meet
MCC criteria. The criteria and the methodology for applying them have evolved over
time.
Pursuant to reporting requirements set in the MCC legislation, each year the
Corporation sends to Congress an overview of the criteria and methodology that
would be used to determine the eligibility of the candidate countries in that fiscal
year. The criteria have been altered and refined, sometimes dramatically, over time.
While the MCC 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;
! respects worker rights;
! supports a sustainable management of natural resources; and
! makes social investments, especially in women and girls.
For each of these, the MCC has sought to use supplemental data and qualitative
information to inform its decisions on Compact eligibility. The latter two factors
have led to the development of new indicators.
With regard to the requirement added by Congress regarding social investments
in women and girls, at first the MCC reported it would draw on girls’ primary
enrollment rates to supplement the four social investment performance indicators.
But in FY2005, an indicator measuring girls’ primary education completion rates
replaced a broader measure used in FY2004 that did not disaggregate primary
education graduation by gender.
Beginning with 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). For FY2006, the
Corporation added 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. The Corporation believed that not only did the new indicator
have a strong correlation with economic growth, but that it was a measurement that
might encourage governments to take action in order to improve their scores. Since
the initial use of the indicator Days to Start a Business, MCA candidate countries had
5 MCC Public Outreach Meeting, February 15, 2007.

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CRS-6
introduced many business start-up reforms, the results of which were reflected in a
lowered median for this category. MCC officials hoped that adding an indicator for
the Cost of Starting a Business would stimulate additional policy improvements.
They believed that the Country Credit Rating indicator was not as well linked to
policy reforms and that it had a greater income bias than other MCC indicators.
Efforts to develop a measurement to assess a country’s commitment to policies
that promote sustainable management of natural resources as required by Congress
led to the adoption of two new indicators, first used as supplemental information in
determining FY2007 MCA eligibility and then integrated with all the other indicators
beginning with the FY2008 eligibility process. The Natural Resources Management
index is a composite of indicators: whether the country is protecting at least 10% of
its biomes, the percentage of population with access to sanitation and clean water,
and child mortality levels. It has been placed in the Investing in People basket,
raising the number of those indicators to five. The Land Rights and Access index
looks at whether land tenure is secure and access to land is equitable, and the number
of days and cost of registering property. It has been placed in the Economic Freedom
basket. That basket remains at six indicators, because, beginning in FY2008, the
MCC collapsed the Days to Start a Business and Cost of Starting a Business
indicators into one Business Start-Up indicator.
In addition to adding or refining indicators, the Corporation has also modified
its principal that, in selected cases, countries must score above the median in order
to pass a hurdle, with a rule that scores at the median will represent a passing grade.
This comes into play especially for those indicators (civil liberties, political rights,
and trade policy) where performance is measured on a relatively narrow scale of 1-5
or 1-7. A number of countries fall exactly on the median of these indicators and the
methodology change allowed the MCC to make a more refined determination of
whether a country passes or fails these hurdles.
In December 2006, Ambassador Danilovich announced that the MCC would
apply gender analysis to all aspects of the MCC program, including country selection
and Compact development and implementation.
Selecting Eligible Countries
Shortly after release of the performance criteria, the MCC publishes a scorecard,
showing where each candidate country’s performance falls in relation to the other
candidate countries in its peer group (i.e., lower income countries “compete” with
other lower income countries and lower-middle income countries with other lower-
middle income countries). Some time later, the MCC Board meets to select its list
of countries eligible to apply for Compact assistance.
A review of the history of MCC selections suggests that the Board is guided by,
but not entirely bound to, the outcome of the performance indicator review process;
Board members can apply discretion in their selection. Performance trends, missing
or old data, and recent policy actions might come into play during selection
deliberations.

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CRS-7
For example, in its first year, FY2004, the MCC selected 16 countries. The
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 10 countries
also passed these additional tests.
For 10 other countries, however, some discretion was applied by the Board. In
three cases, countries which met the criteria but fell significantly below average on
one indicator were still selected by the Board due to recent policy changes or positive
trend lines. Cape Verde, for example, scored poorly on the Trade Policy indicator,
but the Board took into account the country’s progress towards joining the World
Trade Organization and implementing a value added tax that will reduce reliance on
import tariffs. Lesotho did not score well on the measurement for Days to Start a
Business. The MCC Board, however, took note of Lesotho’s creation of a central
office to facilitate new business formation and saw positive performance on other
factors related to business start-ups. Sri Lanka scored far below the median on Fiscal
Policy, but the most recent trends suggested that the government was making
progress in reducing its budget deficit.
For three other countries — Bolivia, Georgia, and Mozambique — the Board
deviated from a strict application of the selection criteria because of evidence that the
governments were taking corrective actions in the deficient areas. Bolivia fell at the
median (as opposed to above the median) on the corruption indicator, something that
would eliminate it from consideration. The Board, however, noted that President
Mesa, who took office in October 2003, had created a cabinet position to coordinate
anti-corruption activities and an office to investigate police corruption. Georgia, with
a newly elected government that had created an anti-corruption bureau and taken
other steps to fight corruption, was also selected despite scoring below the median
on corruption and three other “ruling justly” indicators. Mozambique, which failed
on corruption and each of the four “investing in people” indicators, was chosen based
on supplemental data that was more current than information available from the
primary data sources. This evidence, the Board felt, demonstrated Mozambique’s
commitment to fighting corruption and improving its performance on health and
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

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CRS-8
country — Guyana — was also not selected despite passing the necessary hurdles.
It scored particularly low on the Fiscal Policy measurement.6
As the candidate pool has expanded in succeeding years while funding levels
failed to meet expectations, the Board has become increasingly more selective. Many
outside the MCC support the approach of keeping the number of new participants to
a few so that future Compacts can be larger and emphasize “transformational”
development opportunities as the MCA program originally envisioned.
For FY2005, the Board did not select 10 countries that met the criteria,
including Bhutan, Vietnam, Guyana, Burkina Faso, China, Djibouti, Egypt, Nepal,
the Philippines, and Swaziland. The Corporation offered little explanation as to why
these countries were not chosen.7 It appeared, however, that scoring “substantially
below” — perhaps in the lowest 25th percentile — on an indicator had 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.8 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 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. For FY2004, the Board chose three nations — Bolivia,
Georgia, and Mozambique — that did not pass the so-called “hard-hurdle” of
corruption. The latter two again qualified despite falling below the median on
corruption, while Bolivia did not require an exemption after the median dropped
below its score with the addition of new countries. For FY2005, five nations —
Malawi, Moldova, Paraguay, Tanzania, and Ukraine — passed the required number
of performance indicators, except corruption. Although Malawi, Paraguay, and
Tanzania are Threshold Countries, none of the five were chosen for full MCA status.
In FY2006, the Board did not choose eight countries in the low-income group
that qualified and did not use its discretionary powers to select any new nations that
6 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.”
7 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.
8 Comments by Paul Applegarth at a State Department Foreign Press Center Briefing,
November 9, 2004.

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CRS-9
failed to meet the minimum requirements.9 Bhutan, China, and Vietnam passed
enough hurdles but did not qualify, as was the case the previous two years, based on
very low scores on political rights and civil liberties. Kiribati, the Philippines, and
India were not selected most likely because some of their scores were substantially
below the median. India also presents a challenging case for the Board in that,
despite qualifying, it is a country with a significantly large poor population which
would require a sizable MCA Compact in order to produce a reasonable degree of
impact on poverty reduction. It is also a nation with the means to attract capital and
investment from other sources. Egypt, also not selected, falls into a somewhat
different category as the second largest recipient of annual U.S. assistance based on
a strategic rationale. The reason for not selecting Uganda, despite having passed 12
of the 16 indicators and not falling significantly below the median on the other 4, is
less obvious.
In its first year of choosing among lower-middle-income countries, the Board’s
approach was less clear. A number of analysts had 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.10 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.11 It appears, however, that the
Board could have decided to select none of the lower-middle-income nations by
using criteria it had applied consistently in the two previous rounds. Moreover, it
was not clear why the Board chose the two that did qualify and excluded others.
All eight LMICs that passed the performance indicator test fell significantly
below the median on at least one of the indicators. El Salvador and Namibia, the two
that were selected, both had low scores on fiscal policy. El Salvador also scored well
below the median on the costs of starting a business, while Namibia also did poorly
on days to start a business and immunization rates. The other six that were not
chosen — Brazil, Bulgaria, Jordan, Samoa, Thailand, and Tunisia — also performed
substantially below the median in at least one area, although Jordan was selected to
participate in the Threshold program. What separated these latter six from El
Salvador and Namibia, however, was not explained by the Board.
Although the Gambia was selected in FY2006, its eligibility for MCA assistance
was suspended by the MCC Board on June 16, 2006, because of “a disturbing pattern
of deteriorating conditions” in half of the 16 conditions that are used to determine
9 Georgia and Senegal were selected despite not passing the necessary hurdles, but both had
been chosen in FY2004 and FY2005.
10 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.
11 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-10
candidate countries. Among the problems cited in this case were human rights
abuses, restrictions on civil liberties and press freedom, and worsened anti-corruption
efforts.
On November 8, 2006, the MCC Board added three new countries to the list of
those eligible for FY2007 MCA grants — Moldova, Jordan, and Ukraine. Even prior
to the selection, the possible choice of Jordan had come in for severe criticism.
Freedom House, the organization whose annual Index of Freedom is drawn upon for
two of the “Ruling Justly” indicators, had urged the MCC Board to bypass countries
that had low scores on political rights and civil liberties. It argued that countries like
Jordan that fall below 4 out of a possible 7 on its index should be automatically
disqualified. Jordan, however, did well on three of the other indicators in this
category. Several development analysts further argued that Jordan should not be
selected, because the MCA is not an appropriate funding source. They assert that
Jordan, already is one of the largest recipients of U.S. aid, has access to private sector
capital, and is not a democracy.12 In selecting Jordan, the MCC Board appears not
to have been swayed by these arguments.
Another concern expressed by observers regarding the FY2007 selection process
was that four of eleven current Compact countries — Ghana, Benin, Madagascar, and
Cape Verde — would fail if measured under FY2007 indicators. While it was not
expected that existing Compact funding would be withdrawn as it is based on
eligibility in previous years, some had hoped the Board would send a signal of
disapproval of such lapses. However, the MCC Board did not address this issue at
the November 2006 candidate selection meeting.
Table 1. Compact-Eligible Countries: FY2008
Low-Income Countries
Benin
Malawia
Bolivia
Mali
Burkina Faso
Moldova
East Timor
Mongolia
Georgia
Mozambique
Ghana
Nicaragua
Honduras
Philippinesa
Lesotho
Senegal
Madagascar
Tanzania
Vanuatu
12 Freedom House, “Millennium Challenge Corporation Should Hold Countries to Higher
Standards of Democratic Governance,” November 2, 2006 [http://www.freedomhouse.org];
Sheila Herrling, Steve Radelet, and Sarah Rose, “Will Politics Encroach in the MCA
FY2007 Selection Round? The Cases of Jordan and Indonesia,” Center for Global
Development, October 30, 2006, [http://www.cgdev.org].

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CRS-11
Lower-Middle-Income Countries
Armenia
Morocco
El Salvador
Namibia
Jordan
Ukraine
a. New for FY2008.

Country Selection — FY2008. On March 11, 2008, the MCC Board added
the Philippines to the list of countries eligible to apply for a Compact. It joins 24
countries, previously selected on December 12, 2007. Of these, Malawi is the only
other new entry. Two countries that had appeared in the past were absent in the 2008
list. Sri Lanka is left out because of the resurgent civil strife that would make a
Compact problematic, and Cape Verde for more complicated reasons. Under the
recent changes in the qualifying indicators, Cape Verde would not have been eligible
for the third year in a row, and, as a lower-middle income country, is more strictly
judged. Nonetheless, according to the MCC, 12 of the 24 countries that made the cut
did not meet the FY2008 criteria, five of them failing the control of corruption
indicator. One reason that the MCC has re-selected these countries is that they are
viewed as maintaining or improving their performance rather than adopting policies
contrary to the criteria. This approach is taken because countries following
reasonable policies may fall behind the performance criteria when other countries are
improving faster — thereby raising the bar. They may also fail when new criteria are
introduced which countries have not had an opportunity to address and when
institutions measuring performance refine or revise their indicators.
MCA Compacts and Program Proposals
Once declared as eligible, countries may prepare and negotiate program
proposals with the MCC. Only those Compact proposals 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 Compact proposals.
While acknowledging that Compact proposal contents likely will vary, the
Corporation expects each to discuss certain matters:
! a country’s strategy for economic growth and poverty reduction,
impediments to the strategy, how MCA aid will overcome the
impediments, and the goals expected to be achieved during
implementation of the Compact;
! why the proposed program is a high priority for economic
development and poverty reduction and why it will succeed; the
process through which a public/private dialogue took place in
developing the proposal;
! how the program will be managed, monitored, and sustained after
the Compact expires;
! the relationship of other donor activities in the priority area;
! examples of projects, where appropriate;

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CRS-12
! a multi-year financial plan; and
! a country’s commitment to future progress on MCA performance
indicators.
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. Proposals are developed by a country with the guidance of and
in consultation with the MCC. Sometime during the proposal development process,
the MCC may provide so-called pre-Compact development grants to assist the
country’s efforts. Among other things, grants may be used for design studies,
baseline surveys, technical and feasibility studies, environmental and social
assessments, ongoing consultations, fees for fiscal and/or procurement agents, and
the like. For example, in December 2007, the MCC provided Burkina Faso with a
pre-Compact development grant of $9.4 million, not counted as part of the final
Compact.
Once a proposal is submitted, the MCC conducts an initial assessment, then, on
the basis of that assessment, launches a due diligence review that closely examines
all aspects of the proposal, including costs and impacts. At the same time, MCC staff
work with the country to refine program elements. Finally, the MCC negotiates a
final Compact agreement prior to its approval by the MCC Board. The Compact is
signed but does not enter into force until supplemental agreements on disbursements
and procurement are reached.13
The MCC signed its first Compact, with Madagascar, on April 18, 2005, an
event that was followed by four other signings in 2005 — with Honduras, Cape
Verde, Nicaragua, and Georgia. In 2006, six more agreements were signed: Benin,
Vanuatu, Armenia, Ghana, Mali and El Salvador. In 2007, four Compacts were
signed — with Mozambique, Lesotho, Morocco, Mongolia. In 2008, three, with
Tanzania, Burkina Faso, and Namibia have been signed.
The case of Madagascar is a good example of how the Compact process is
expected to take shape. Elements of the design, negotiation, and completion of the
Madagascar Compact met several of the key criteria of the MCA process.
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 is handled by a new entity,
MCA-Madagascar, whose Steering Committee 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
was fully obligated when the Compact entered 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.
13 Details on each of the negotiated Compacts can be found at the MCA website:
[http://www.mcc.gov].

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CRS-13
Compact Descriptions. The 18 Compacts agreed up to this point are
described below (also see Table 3). In addition to individual Compact components
noted in each description, Compact totals include administrative and monitoring
costs.
Madagascar. The Madagascar Compact is a four-year, $110 million program,
focusing on rural agriculture development and poverty reduction. Specifically, the
project has three objectives: 1) to increase land titling and land security ($36 million);
2) to expand the financial sector and increase competition ($36 million); and 3) to
improve agricultural production technologies and market capacity in rural areas ($17
million). According to the MCC, the Compact is designed to assist Madagascar’s
rural poor, which account for 80% of the nation’s impoverished population, and
generate income by expanding opportunities to own land, to access credit, and to gain
technical training in agriculture and market identification.
Honduras. The five-year, $215 million MCA Compact with Honduras focuses
on two objectives — rural development and transportation. The rural development
project, representing $72.2 million of the Compact, will assist small and medium-size
farmers enhance their business skills and to transition from the production of basic
grains to horticultural crops, such as cucumbers, peppers, and tomatoes. According
to the MCC, these vegetable crops will generate about $2,000 to $4,000 in annual
income per hectare, compared with roughly $500 for basic grains. The project
intends to provide farmers with the appropriate infrastructure and necessary training
for producing and marketing these different crops. The transportation project,
totaling $125.7 million of the Compact, will improve the major highway linking
Honduran Atlantic and Pacific ports, and major production centers in Honduras, El
Salvador, and Nicaragua. Rural roads will also be upgraded, helping farmers
transport their goods to markets at a lower cost. Specific results sought in the
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. 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

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CRS-14
rainfall water, the project hopes to increase agricultural production
and double the household income of farmers.
Nicaragua. The five-year, $175 million Compact with Nicaragua will focus
on the promoting economic growth primarily in the northwestern region of the
country where potential opportunities exist due to the area’s fertile land and nearby
markets in Honduras and El Salvador. The Compact has three components: 1) to
strengthen property registration ($26.5 million); 2) to upgrade primary and secondary
roads between Managua and Leon and to provide technical assistance to the Ministry
of Transportation ($92.8 million); and 3) to promote higher-profit agriculture
activities, especially for poor farmers, and to improve water supply in support of
higher-value sustainable agriculture.
Georgia. The $295 million, five-year agreement with Georgia focuses on
reducing poverty and promoting economic growth in areas outside of the capital
where over half the population lives in poverty. The Compact is divided into two
projects. The first and the largest component ($211.7 million) concentrates on
infrastructure rehabilitation, including roads, the north-south gas pipeline, water
supply networks, and solid waste facilities. The Enterprise Development Project
($47.5 million) will finance an investment fund aimed at providing risk capital and
technical assistance to small and medium-sized businesses, and support farmers and
agribusinesses that produce commodities for the domestic market. The program
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.
On September 17, 2008, the MCC Board discussed “the possibility” of
providing an additional $100 million to the existing $295 million Compact with
Georgia. The Board was responding to a September 4, 2008, $1 billion
Administration aid initiative for Georgia, of which the MCC was a component. The
additional funds would likely be directed at road projects, water and sanitation
facilities, and a natural gas storage facility.
Armenia. The five-year, $236 million Compact concentrates on the
agricultural sector, investing in the rehabilitation of rural roads ($67 million) and
improving irrigation ($146 million). The program anticipates that it will benefit
about 750,000 people, 75% of Armenia’s rural population, by improving 943
kilometers of rural roads and increasing the amount of land under irrigation by 40%.
Misgivings have been raised both prior to and during implementation of the
Armenia Compact. In September 2005, the MCC expressed concerns with Armenian
officials regarding slippage on two of the governance indicators and matters raised

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CRS-15
by international groups concerning political rights and freedoms in the country.
Moreover, the MCC Board delayed final approval of the Compact following the
November 27, 2005, constitutional referendum, after allegations of fraud,
mismanagement, limited access by the press, and abuse of individuals were raised.
In signing the Compact on March 27, 2006, the MCC issued a cautionary note,
signaling that Armenia must maintain its commitment to the performance indicators
or risk suspension or termination of the Compact. On March 11, 2008, the MCC
issued a warning that assistance might be suspended or terminated in response to the
government’s actions, including the imposition of a state of emergency and
restrictions on press freedoms.14
Vanuatu. The $65.7 million, five-year Compact targets improvements broadly
in multiple types of infrastructure, including roads, wharfs, an airstrip, and
warehouses. The objective is to increase the average per capita income by 15%, by
helping rural agricultural producers and providers of tourism-related goods and
services. The Compact further aims to help strengthen Vanuatu’s Public Works
Department in order to enhance capacity to maintain the country’s entire transport
network.
Ghana. The five-year $547 million Compact focuses on agriculture and rural
development. Poverty rates in the three targeted geographic areas are above 40%.
The agriculture component ($241 million) will provide training for farmer-based
organizations, improve irrigation, provide greater access to credit, and rehabilitate
local roads. The transport component ($143 million) will seek to reduce transport
costs to farmers by improving key roads, such as the one between the capital and the
airport, and an important ferry service. Rural development programs ($101 million)
will construct and rehabilitate education, water, and electric facilities, among other
activities.
Benin. Benin, one of the world’s poorest countries with the lowest Human
Development Index ranking of any MCC Compact nation, has been approved for a
$307 million, five year program focused on four sectors:
! Land rights, reducing the time and cost of obtaining property title;
! Financial services, helping micro, small, and medium-sized
businesses;
! Justice reform, assisting the judicial systems capacity to resolve
business and investment claims; and
! Market access, improving the Port of Cotonou.
The Compact’s goal is to benefit five million people, bringing 250,000 of the
population out of poverty by 2015.
Mali. The five-year $461 million Compact emphasizes an increase in
agricultural production and expansion of trade. About half the funds ($234.6
million) will support a major irrigation project, including modernization of
14 See letters of John Danilovich to Armenia President Robert Kocharyan on December 16,
2005 and March 11, 2008 on MCC website.

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CRS-16
infrastructure and improvements in land tenure. Improvements in the airport ($89.6
million) will target both passenger and freight operations. An industrial park project
located at the airport ($94.6 million) will assist agro-processing and other industry.
El Salvador. The five-year $461 million Compact will address economic
growth and poverty reduction concerns in El Salvador’s northern region where more
than half the population lives below the poverty line. Education as well as water and
sanitation, and electricity supply ($95.1 million); support for poor farmers and small
and medium-sized business ($87.5 million); and transportation, including roads
($233.6 million) are the chief elements of program.
Mozambique. The five-year $506.9 million Compact, like most other
Compacts, targets specific districts, in this case the less prosperous North of the
country. The Compact has four components. Water and sanitation services will be
improved ($203.6 million), a major road will be rehabilitated ($176.3 million), land
tenure services will be made more efficient ($39.1 million), and steps will be taken
to protect existing coconut trees, improve coconut productivity, and support
diversification to other cash crops ($17.4 million). The long-term objective is to
reduce the projected poverty rate by more than 7%.
Lesotho. The five-year $362.6 million Compact has three elements. A water
sector project ($164 million) will focus on both industrial, supporting garment and
textile operations, and domestic needs. It will also support a national watershed
management and wetlands conservation plan. A health project ($122.4 million) will
seek to strengthen the health care infrastructure, including renovation of up to 150
health centers, improved management of up to 14 hospital out-patient departments,
construction and equipping of a central laboratory, and improved housing for medical
staff and training for nurses. A private sector development project ($36.1 million)
will address a wide range of legal and administrative obstacles to increased private
sector activity, including development of land policy and administration authority,
implementation of a new payments and settlement system, and improvement of case
management of commercial courts.
Morocco. The five-year, $697.5 million Compact has multiple components,
all aimed at increasing private sector growth. These include efforts to increase fruit
tree productivity ($300.9 million), modernize the small-scale fisheries industry
($116.2 million), and support artisan crafts ($111.9 million). In addition, the
Compact will fund financial services to micro-enterprises ($46.2 million) and will
provide business training and technical assistance aimed at young, unemployed
graduates ($33.9 million).
Mongolia. The most significant part of the five-year $285 million Compact
intends to stimulate economic growth by refurbishing the rail system, including
infrastructure and management ($188.38 million). In addition, the Compact will
support improvements in the property registration and titling system ($23.06 million)
and the vocational education system ($25.51 million). The Compact will also
attempt to reform the health system to better address non-communicable diseases and
injuries, which are rapidly increasing in the country ($17.03 million).

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CRS-17
Tanzania. The five-year, $698 million Compact will focus on three key
economic infrastructure issues. A transport sector project ($373 million) will
improve major trunk roads, select rural roads, general road maintenance capabilities,
and upgrade an airport. An energy sector project ($206 million) will lay an electric
transmission cable from the mainland to Zanzibar, will construct a small hydro-
electric plant at Igamba Falls, and will rehabilitate the existing distribution system
to unserved areas. A water sector project ($66 million) will expand a clean water
treatment facility serving the capital, reduce water loss in the capital region, and
improve the water supply in Morogoro, a growing city.
Burkina Faso. The five-year, $480.9 million Compact has four elements. A
rural land governance project ($59.9 million) will focus on improving legal and
institutional approaches to rural land issues, including registration and land use
management. An agriculture project ($141.9 million) will target water management
and irrigation, diversified agriculture, and access to rural finance in specific regions
of the country. A roads project ($194.1 million) will improve rural roads. The
education effort ($28.8 million) will build on the country’s MCC threshold program
and construct additional classrooms and provide daily meals to children. The
education project will be administered by USAID.
Namibia. The five-year, $304.5 million Compact will focus on education,
tourism, and agriculture. The education project ($145 million) will improve school
infrastructure and training, vocational and skills training, and textbook acquisition.
The tourism project ($67 million) will target management and infrastructure in
Etosha National Park, the premier wildlife park in Namibia, and build ecotourism
capacity in the country. The agriculture project ($47 million) will focus on land
management, livestock support, and production of indigenous natural products.
“Threshold” Countries and Programs
In order to encourage non-qualifying countries to improve in weak areas, the
MCC will help governments that are committed to reform to strengthen performance
so that they would be more competitive for MCA funding in future years. Congress
provided in authorizing legislation that not more than 10% of MCA appropriations
could be used for such purposes, stating that the funding could be made available
through USAID. Subsequent foreign operations appropriations have made 10% of
new MCA appropriations available for this Threshold assistance.15
According to the Threshold Program Policy guidance issued by the
Corporation,16 the program will assist countries make policy reforms and institutional
changes in areas where they failed to meet the MCA performance criteria. Those
countries deemed eligible for the program must submit concept papers identifying:
! where and why the country failed to pass specific indicators;
15 Initially, assistance for Threshold countries was authorized only for FY2004.
16 Found at [http://www.MCC.gov].

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CRS-18
! 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 has been 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.
Currently, 21 countries are eligible for threshold assistance. To date, the
threshold programs of 20 countries totaling more than $445 million have been
approved by the MCC Board — Albania, Tanzania, Burkina Faso, Malawi, Moldova,
Philippines, Zambia, Jordan, Indonesia, Ukraine, Paraguay, Kenya, Uganda, Guyana,
Kyrgyz Republic, Yemen (program postponed on October 26, 2007, pending review),
Sao Tome and Principe, Peru, Niger, and Rwanda. The only country that is eligible
but has not yet been awarded threshold program support is East Timor. Mauritania
was made eligible in 2007, but cannot be offered a program due to aid prohibitions
on governments deposed by a coup. Also, in December 2007, the MCC Board
invited three countries — Albania, Paraguay, and Zambia — to submit proposals for
follow-on threshold programs (stage II) as their initial threshold programs will expire
this year. In September 2008, the MCC Board approved a $16.4 million stage II
program for Albania. MCC officials indicate that Zambia will not likely require the
stage II program as it now passes the corruption indicator the program was meant to
address.
Funding levels for threshold programs differ, most recently ranging from $8.7
million for Sao Tome and Principe to $35.6 million for Peru. Of the 20 programs,
15 seek to improve country scores on the corruption indicator. Several countries
have multiple objectives. Indonesia and Peru, for example, target both corruption
and immunization indicators. Albania’s first program focuses on corruption and
improvements in its business environment. The Burkina Faso program is designed
to improve girls’ primary education, targeting areas of the country with the lowest
primary completion rates.

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CRS-19
Select Issues
Role of USAID and the Future of Agency Programs in
MCA Countries
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 and consult with USAID and directs
the Agency to ensure that its programs play a primary role in helping candidate
countries prepare for MCA consideration. USAID maintains missions in most of the
eligible countries and might be expected to support MCC programs, through
contracting, procurement, and monitoring tasks. Although USAID is the chief
implementor on behalf of the MCC of threshold programs, its role in other aspects
of MCC activities is not clear.
Another question is how USAID will adjust its own programs in MCA
countries. Then-USAID Administrator Natsios told the House Appropriations
Committee on May 13, 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. Nonetheless, some critics continue to express
concern that MCA funding is not always additive, as had been the pledge, but will
substitute for portions of previous USAID bilateral development aid programs. The
FY2008 budget request offered a look at how funding levels might be affected by
MCA Compacts. With the exceptions of new entries Lesotho, Mozambique, and
Morocco, in Compact countries where there had been a bilateral economic assistance
program, that assistance would be reduced under the FY2008 budget plan from
FY2006 levels. In its FY2008 report on the State/Foreign Operations bill (H.Rept.
110-197), the House Appropriations Committee made note of this trend and
expressed the view that MCC aid should be “a complement,” not a substitute, to the
current aid program.
Compact Sectors
One feature of the first series of Compacts drew particular attention. Most of
the early Compacts included a similar sector concentration, focusing on agriculture
and transportation infrastructure projects. While these activities are well justified,
the similarity across Compacts surprised some observers. Given the wide diversity
of conditions in each of the countries, plus the Corporation’s willingness to support
all types of programs, many 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,

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CRS-20
countries that qualify for MCA support are selected because they have already
demonstrated stronger performance in managing resources and fighting corruption.17
As more Compacts are signed, some diversity in programs is creeping in — three of
the more recent ones, in Lesotho, Mozambique, and Tanzania, feature a water and
sanitation component. The Morocco Compact includes micro-credit and artisan
crafts support among its projects. Burkina Faso and Namibia have education
components.
Compact Size
A second closely examined characteristic of the early Compacts was the dollar
size of the grants; or, more specifically, the lower-than-anticipated funding level for
the first several Compacts. While Administration officials said repeatedly that
Compacts would be funded at various levels depending on the nature and potential
impact of the proposal, the presumption was 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 said that the size of its grants
must place MCA assistance among the top aid donors in a country.18 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.19 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 several Compacts, however, did not meet the anticipated
financial allocation thresholds. Madagascar’s four-year, $110 million Compact
roughly doubled U.S. assistance to the country, but did not place MCA assistance
among the top donors. France was the largest bilateral donor, disbursing on average
$189 million per year, 2001-2004. The European Commission’s aid program, 2001-
2004, averaged $82 million per year, while the World Bank’s International
Development Association was Madagascar’s largest source of concessional
assistance of about $209 million lent in each of 2001 through 2004.20 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 had 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).
17 James Fox and Lex Rieffel, The Millennium Challenge Account: Moving Toward Smarter
Aid. The Brookings Institution, July 14, 2005, p. 24.
18 See, for example, Millennium Challenge Corporation FY2005 Budget Justification, p. 7.
Found at [http://www.mcc.gov/about/reports/congressional/budgetjustifications/budget_
justification_fy05.pdf].
19 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.
20 Organization for Economic Cooperation and Development (OECD), Geographical
Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition.

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CRS-21
For Honduras (a $215 million MCA program over five years), Georgia ($295
million over five years), and Armenia ($236 million over five years), the United
States was the top bilateral donor without the MCA program, and will likely remain
in that position as MCA are disbursed. But the MCA Compact for Honduras called
for only a slightly higher annual amount ($43 million) than U.S. economic assistance
provided ($34 million) at the time, while Georgia’s Compact will average only about
three-fourths and the Armenia Compact only about two-thirds of the annual level of
recent American aid. While these are not insignificant amounts of new resources,
they are far less than Administration officials had suggested previously.21
In contrast, the early five-year Compacts with Cape Verde ($110 million), Benin
($307 million), and Vanuatu ($66 million) represented a substantial investment by
the United States, relative to the size of recent American aid and the size of their
economies. 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 places the
United States second to Portugal, Cape Verde’s former colonial power, as the leading
donor, and represents more than a quarter of total bilateral development aid grants
from all sources compared with figures for 2003 and 2004. Likewise, the United
States does not maintain a bilateral program with Vanuatu, limiting direct aid through
the Peace Corps. The $13 million annual average of the Vanuatu program places the
United States as the country’s top aid donor, along with Australia. In Benin, USAID
manages an annual bilateral economic aid program of about $15 million, compared
with the $61 million annual size of the MCC Compact. The Compact likely places
the MCC as the top aid donor, together with France, for Benin.22
This issue has been a priority of Ambassador Danilovich since his September
27, 2005 confirmation hearing to be the MCC’s new CEO. He noted that the MCC
was “meant to create transformative programs,” and to do so he said that “future
Compacts will generally need to be larger than those signed thus far.” Ambassador
Danilovich cautioned, however, that with limited resources but larger Compacts,
fewer countries will receive funding if MCC is to achieve its transformational goal.23
Since assuming the CEO position, he has moved the MCC towards larger Compacts
and placing the MCC as the largest donor in recipient countries.
Speed of Implementation
A recurrent criticism of the MCC, especially in Congress, is the slow speed of
implementation, reflected largely by the limited amount of disbursements made to
date. As perhaps the leading cause of cuts in MCC funding from the Administration
request and of threatened rescissions from amounts already appropriated, this view
21 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.
22 Geographical Distribution of Financial Flows to Aid Recipients, 2000/2004: 2006 edition.
23 Prepared statement of John J. Danilovich, before the Senate Committee on Foreign
Relations, September 27, 2005.

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CRS-22
has had severe consequences for the MCC (see below). As of the end of June 2008,
of the $7.5 billion appropriated for the MCC, only $727 million, or 10%, has been
disbursed. More than $6.5 billion, however, had been obligated by mid-September
2008.
There are some good reasons for this spending rate. The MCC is a new
experiment, and it has taken considerable time to develop methods of operation,
including settling on the rules of eligibility and the requirements of Compact
proposals. Further, the countries themselves are responsible for developing
proposals, and they have problems common to most developing countries in
managing complex programs to meet donor requirements of accountability. The
GAO found that for five signed Compacts in Africa — with Madagascar, Cape
Verde, Benin, Ghana, and Mali — the process of going from eligibility to compact
signature took between 12 and 31 months. Four of these compacts entered into force
about five months after compact signature.24
Once launched, Compacts may be slow to get underway. For two in their third
year — Madagascar and Cape Verde — disbursements have been slow, only 27%
and 16%, respectively, of planned disbursements had been made by end of March
2008. Among the causes are delays by these Compact countries in filling managerial
positions. The nature of many of the Compacts is also responsible for the delays.
Typically, infrastructure projects are slow to disburse funds, the majority of activity
in the first few years being the design and planning of projects rather than actual
construction.
Whatever the causes, the MCC has responded to the criticisms by arguing that
projected annual Compact disbursements by 2009 will top $1 billion. The MCC is
also attempting to shift its organizational focus from the early emphasis on Compact
development to Compact implementation. In October 2007, it announced a
reorganization aimed at facilitating implementation.
Compact Impact
The purpose of the MCA is to reduce poverty by supporting economic growth,
but some observers have complained about the lack of measurable results to date.
There are some possible reasons for this, most prominently the slow speed of
Compact implementation noted above. As a result, it will likely be some time before
a serious analysis of actual impacts can be undertaken.
A recent GAO report highlighted a related concern, that, in the case of Vanuatu,
projected impacts have been overstated. The GAO noted that the MCC estimated a
rise from 2005 per capita income in Vanuatu of about 15% ($200) by 2015 when, in
fact, the data suggest it would rise by 4.6%. Although the MCC states that the
Compact would benefit 65,000 poor, rural inhabitants, the data, according to the
GAO, do not establish the extent of benefit to the rural poor. Further, the MCC
projections assume continued maintenance of projects following completion, whereas
24 Government Accountability Office, Millennium Challenge Corporation: Progress and
Challenges with Compact in Africa, Testimony, June 28, 2007, GAO-07-1049T.

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CRS-23
the experience of previous donors is that such maintenance has been poor.25 The
MCC response is that, although there may be varying views on the degree of benefit,
both agencies agree that the underlying data show that the Compact will help
Vanuatu address poverty reduction.26
In lieu of results from the Compacts, MCC officials have pointed to the impact
made by the MCC process itself. Under the so-called MCC effect, many countries
are said to be establishing reforms in an effort to qualify under the 17 indicators.
Yemen has been cited in this regard, because, following its suspension from the
threshold program in 2005, it approved a number of reforms to address indicators
where its performance had lapsed (and subsequently was reinstated). Both the House
and Senate approved resolutions in 2007 (H.Res. 294 and S.Res.103) noting the role
the MCC played in encouraging Lesotho to adopt legislation improving the rights of
married women.
Rising Costs
The majority of Compact projects support construction of economic
infrastructure, primarily roads and water and sanitation systems. In the past year,
costs for the machines and material necessary for these activities have been rising
worldwide. At the same time, the U.S. dollar has depreciated significantly. As a
result, MCC projects are faced with having less funding than envisioned to meet the
agreed-on objectives. The MCC reports that at least six projects are expected to be
scaled-back from the original plans or may be supplemented by financing from other
sources.
Funding Issues
In each year since the MCA was established, the MCC proposal was by far the
largest increase sought by the Administration in the Foreign Operations
appropriations bill and viewed by many observers as one of the most vulnerable
items in an increasingly difficult budget environment. In each year as well, its
enacted appropriation has been well below the President’s request.
Supporters of the MCC are disturbed by this trend, reflected again in the
congressional funding level for FY2008, well below the Administration request.
They argue that countries that have gone through the whole process of seeking
eligibility and designing and refining a proposal are likely to seek funding elsewhere
if they have to wait long for MCC funding to become available. Further, the so-
called MCC effect, which encourages countries to reform on their own in order to
meet eligibility requirements, is likely to be lost if fewer Compacts are offered
annually.
25 Government Accountability Office, Millennium Challenge Corporation: Vanuatu
Compact Overstates Projected Program Impact, July 2007, GAO-07-909.
26 Testimony of Rodney Bent before the House Committee on Foreign Affairs,
Subcommittee on Asia, the Pacific, and the Global Environment, July 26, 2007.

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CRS-24
Table 2. MCA Appropriations: FY2004-FY2009
(in $ billions)
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
Request
1.300
2.500
3.000
3.000
3.000
2.225
Appropriation
0.994
1.488
1.752
1.752 1.486a
1.544b
a. Original appropriation was $1.544 million. $58 million was rescinded in P.L.110-252.
b. Funding availability under continuing resolution (P.L. 110-329) effective through March 6, 2009.
MCA Request and Congressional Action for FY2009. On February 4,
2008, the Administration requested $2.225 billion for the MCA in its FY2009
budget, a 44% increase over the FY2008 appropriation.
On July 16, 2008, the House State/Foreign Operations Subcommittee approved
its version of the FY2009 appropriations, providing $1.5 billion for the MCC, a 33%
cut from the Administration request and the same level as in FY2008.
On July 17, 2008, the Senate Appropriations Committee reported its version of
the FY2009 State/Foreign Operations appropriations (S.Rept. 110-425), providing
$254 million to the MCC, a cut of 86% from the Administration request, and $1.3
billion less than FY2008. The committee explained the cut as a “temporary pause”
in signing of new Compacts to allow for an evaluation of MCC programs. It noted
the small Compact disbursement rate (4% of total Compact funding at the time) and
the lack of tangible results to date as factors in support of this step. The committee
stated its intention to support future Compacts “if current country compacts are
shown to be cost effective and achieving results.” Its proposed funding level would
allow for two threshold stage 2 agreements, continued due diligence and pre-compact
support, and administrative costs to maintain the MCC. The MCC argues that the
proposed cut would undermine Compact country faith in the MCC process and warns
that several countries in the pipeline, including the Philippines, Jordan, Senegal,
Malawi, Timor Leste, and Moldova, would be negatively affected.
On September 18, 2008, 38 Members of Congress signed a letter addressed to
House Appropriations Committee leadership supporting an FY2009 MCC funding
level at least at the subcommittee-passed level of $1.54 billion.
FY2009 funding for the MCC is currently provided under the terms of a
continuing resolution (H.R. 2638/P.L. 110-329), which allows foreign aid spending
as provided in the FY2008 Consolidated Appropriations Act (P.L. 110-161). The
resolution expires on March 6, 2009. The MCC received $1.54 billion in the FY2008
Consolidated Appropriations Act. However, in line with OMB guidance, the MCC
is assuming a $1.49 billion budget. According to the MCC, this amount will be
sufficient to fund three Compacts of a projected six in the pipeline — Jordan,
Moldova, Senegal, Malawi, Philippines, and Timor-Leste.

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CRS-25
Authorizing Legislation and MCC Reform
Many observers anticipate that an MCC reauthorization measure will be
considered in the 111th Congress. A previous effort, in the 109th Congress (2006),
was reported by the House International Relations Committee (H.R. 4014, H.Rept.
109-563), but received no further consideration. It would have made a number of
policy modifications to the original legislation and would have authorized MCC
appropriations (“such sums as may be necessary”) for fiscal years 2007 through 2009.
The requirement of an authorization of foreign aid programs has been routinely
waived in annual Foreign Operations appropriations bills, as the FY2009 Continuing
Resolution measure did in the case of currently unauthorized foreign aid programs,
including the MCA (section 113).
On September 26, 2008, H.R. 7165 (Payne) was introduced and referred to the
House Foreign Affairs Committee. It addresses several existing restrictions in the
authorizing statute. The bill would allow a Compact to exceed 5 years in length, but
no more than 10, if the Board determines it cannot be completed in 5. It allows
concurrent Compacts (more than one at the same time), and permits follow-on
(subsequent) Compacts, if the Board determines that a prior Compact has met its
objectives. The bill would also allow regional Compacts, involving two or more
countries.

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CRS-26
Table 3. Status of MCA Compacts
Population
Human
FY06 US
Compact
GNI
Living Below
Development
Econ. Aid
Size
Country
Compact Signed
per capita
$2 p/day (%)
Index Rankinga
(millions)b
(millions)
Compact Focus
$236
-Agriculture/irrigation
Armenia
Mar. 27, 2006
$2,640
31.1%
83
$58.0
5 years
-Rural roads
-Land and property
$307
-Financial services
Benin
Feb. 22, 2006
$570
73.7%
163
$14.2
5 years
-Judicial improvement
-Port rehabilitation
- Rural land governance
$481
- Agriculture
Burkina Faso
July 14, 2008
$430
71.8%
176
$0.0
5 years
- Roads
- Education
- Agriculture
$110
Cape Verde
July 4, 2005
$2,430
NA
102
$0.0
- Transport/roads
5 years
- Private sector
-Education
$461
El Salvador
November 29, 2006
$2,850
40.5%
103
$24.0
-Transport/roads
5 years
-Small business/farm development
- Infrastructure/gas
$295
Georgia
Sept. 12, 2005
$2,120
25.3%
96
$58.0 ($0.7)
- Transport/roads
5 years
- Agriculture/business
-Agriculture
$547
Ghana
August 1, 2006
$590
78.5%
135
$41.1 ($0.3)
-Transport
5 years
-Rural Development
$215
-Agriculture
Honduras
June 13, 2005
$1,600
44.0%
115
$27.7 ($0.8)
5 years
-Transport/roads
-Water sector
$362.6
Lesotho
July 23, 2007
$1,000
56.1%
138
$3.0 ($6.4)
-Health sector
5 years
-Private sector

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CRS-27
Population
Human
FY06 US
Compact
GNI
Living Below
Development
Econ. Aid
Size
Country
Compact Signed
per capita
$2 p/day (%)
Index Rankinga
(millions)b
(millions)
Compact Focus
$110
- Land titling/Agriculture
Madagascar
April 18, 2005
$320
85.1%
143
$26.0
4 years
- Financial sector
-Irrigation
$460.8
Mali
November 13, 2006
$500
90.6%
173
$38.1
-Transport/airport
5 years
-Industrial park
-Transport/rail
$285
-Property Rights
Mongolia
October 22, 2007
$1,290
74.9%
114
$6.6
5 years
-Voc Ed
-Health
-Agriculture/Fisheries
$697.5
Morocco
August 31, 2007
$2,250
14.3%
126
$18.9
-Artisan Crafts
5 years
-Financial Serv/ Enterprise Support
-Water and Sanitation
$506.9
Mozambique
July 13, 2007
$320
78.4%
172
$44.9 ($148.4)
-Transportation
5 years
-Land Tenure/Agriculture
- Education
$305
Namibia
July 28, 2008
$3,360
55.8%
125
$7.1 ($51.5)
- Tourism
5 years
- Agriculture
$175
- Land titling/Agriculture
Nicaragua
July 14, 2005
$980
79.9%
110
$24.1 ($0.1)
5 years
- Transport/roads
-Transport/roads and airport
$698
Tanzania
February 17, 2008
$400
89.9%
159
$57.3 ($176.5)
-Energy
5 years
-Water
$66
-Transport rehab
Vanuatu
March 2, 2006
$1,840
NA
120
$0.0
5 years
-Public Works Dept.
Sources: Population Living Below $2 Per Day — data from the World Bank, World Development Report, 2007; Gross National Income per capita — 2007 data from the World Bank, World Development
Indicators 2008. Human Development Index Rank — from UNDP, Human Development Report, 2007/08. MCC Information: Millennium Challenge Corporation.
a. The Human Development Index (HDI) is compiled by the U.N. Development Program and is published annually in the UNDP Human Development Report. It is a composite index that measures the
average achievements in a country in three basic dimensions of human development: a long and healthy life, as measured by life expectancy at birth; knowledge, as measured by the adult literacy
rate and the combined gross enrolment ratio for primary, secondary, and tertiary schools; and a decent standard of living, as measured by GDP per capita in purchasing power parity (PPP) U.S.
dollars. The most recent report (2007/08) evaluates 177 countries, with number 1 having the best HDI and number 177 scoring the worst in the Index.
b. U.S. Economic Aid is defined here as Child Survival/Health, Development Assistance, Economic Support Fund, and FREEDOM Support Act. Figure in parenthesis is HIV/AIDS Initiative.

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CRS-28
Table 4A. MCA Low-Income Candidate Countries — FY2009
Criteria: Per capita income $1,785 and below, and not prohibited from receiving
other U.S. economic assistance.
Compact Eligible Countries (FY2008) are in Bold
Compact Countries are followed with (C)
Threshold Eligible Countries (FY2008) are in Italics
Threshold Program Countries are followed with (TC)
Africa
East Asia/Pacific
Latin America
Benin (C)
Cambodia
Bolivia
Burkina Faso (TC) (C)
East Timor
Guyana (TC)
Burundi
Indonesia (TC)
Haiti
Cameroon
Kiribati
Honduras (C)
Central African Rep
Laos
Nicaragua (C)
Chad
Mongolia (C)
Paraguay (TC)
Comoros
Papua New Guinea
Congo, Dem Rep of
Philippines (TC)
Congo, Rep of
Solomon Islands
Djibouti
Eritrea
Vietnam
Ethiopia
Gambia
Ghana (C)
Guinea
Guinea-Bissau
South Asia
Mid-East
Kenya (TC)
Afghanistan
Egypt
Lesotho (C)
Bangladesh
Yemen
Liberia
Bhutan
Madagascar (C)
India
Malawi (TC)
Nepal
Mali (C)
Pakistan
Mozambique (C)
Sri Lanka
Niger (TC)
Nigeria
Eurasia
Europe
Rwanda
Kyrgyz Rep. (TC)
Kosovo
Sao Tome&Principe (TC)
Moldova (TC)
Senegal
Tajikistan
Sierra Leone
Turkmenistan
Somalia
Tanzania (C) (TC)
Togo
Uganda (TC)
Zambia (TC)

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CRS-29
Table 4B. MCA Lower-Middle-Income Candidate
Countries — FY2009
Criteria: Per capita income between $1,786 and $3,705, and not prohibited from
receiving other U.S. economic assistance.
Compact Eligible Countries (FY2008) are in Bold
Compact Countries are followed with (C)
Threshold Eligible Countries (FY2008) are in Italics
Threshold Program Countries are followed with (TC)
Africa
East Asia/Pacific
Latin America
Angola
Marshall Islands
Colombia
Cape Verde (C)
Micronesia
Dominican Rep
Namibia (C)
Samoa
Ecuador
Swaziland
Thailand
El Salvador(C)
Tonga
Guatemala
Tuvalu
Peru (TC)
Vanuatu (C)
South Asia
Mid-East
Maldives
Algeria
Jordan (TC)
Morocco (C)
Tunisia
Eurasia
Armenia (C)
Europe
Azerbaijan
Albania (TC)
Georgia (C)
Bosnia/Herzegovina
Ukraine (TC)
Macedonia

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CRS-30
Table 5. MCC Performance Indicators for FY2008
Ruling Justly
Investing in People
Economic Freedom
Control of Corruption
Public Primary Education Spending as % of GDP
Inflation
Source: World Bank Institute
Sources: UNESCO and National governments
Source: IMF World Economic Outlook
[http://www.worldbank.org/wbi/governance]
Voice and Accountability
Primary Girls’ Education Completion Rate
Fiscal Policy
Source: World Bank Institute
Source: UNESCO
Source: National governments and IMF World
[http://www.worldbank.org/wbi/governance]
Economic Outlook
Government Effectiveness
Public Expenditure on Health as % of GDP
Trade Policy
Source: World Bank Institute
Source: World Health Organization (WHO)
Source: The Heritage Foundation, Index of
[http://www.worldbank.org/wbi/governance]
Economic Freedom
[http://www.heritage.org/research/features/index/]
Rule of Law
Immunization Rates: DPT and Measles
Regulatory Policy
Source: World Bank Institute
Source: World Health Organization (WHO)
Source: World Bank Institute
[http://www.worldbank.org/wbi/governance]
[http://www.worldbank.org/wbi/governance]
Civil Liberties
Natural Resource Management: Eco-Region Protection, Access
Business Start-Up: Days and Cost of Starting a
Source: Freedom House
to Clean Water and Sanitation, Child Mortality
Business
[http://www.freedomhouse.org/template.cfm?page=
Sources: Columbia Center for Int’l Earth Science Info Network
Source: World Bank
15&year=2006]
(CIESIN) and Yale Center for Env. Law and Policy (YCLEP)
[http://www.doingbusiness.org]
Political Rights
Land Rights and Access
Source: Freedom House
Source: Int’l Fund for Agricultural Development
[http://www.freedomhouse.org/template.cfm?page=
(IFAD) and Int’l Finance Corporation
15&year=2006]

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