A Better Way to Fight Global Poverty: Broadening the Millennium Challenge Account

Last March, at the un-sponsored International Conference on Financing for Development in Monterrey, Mexico, President George W. Bush pledged to significantly increase U.S. development assistance to poor nations through the creation of a new Millennium Challenge Account (MCA). The fund would set strict standards of accountability and performance for recipients and would reward a select set of poor countries with as much as $5 billion in new aid by 2006. This initiative has the potential to be a step forward in the evolution of U.S. development policy. But, in its current form, the MCA could also be a step backward in the ongoing U.S. effort to reach out to the majority of poor countries in a coordinated and effective way.

The proposed MCA is a step forward because it builds on an emerging consensus that development works best when poor countries have strong policies on governance and economic reform and take responsibility for reducing poverty and spurring economic growth. This philosophy has helped shape a number of major development initiatives in recent years, including the Heavily Indebted Poor Country (HIPC) debt relief program (which reduces debt for countries that develop independent national poverty-reduction strategies); the Global Fund to Fight aids, Tuberculosis, and Malaria (usually referred to simply as "the Global Fund," it awards money to countries with the most comprehensive strategies to combat infectious diseases); and the Education for All (EFA) initiative (which makes funding contingent on countries' producing credible national plans for achieving universal education).

In addition, the MCA is a step forward because it underscores a growing bipartisan commitment to development assistance. Although some notable Republicans joined the Clinton administration and a coalition of religious groups in pushing for debt relief, during most of the 1990s the Republican Congress sought to limit funding for development assistance. Given that history, President Bush's call for such a substantial increase in effective development assistance has strengthened the emerging consensus that the United States must do more to help the world's poorest countries.

But the MCA also poses a great risk: by dealing with recipient countries only on a bilateral basis, the fund could undo significant recent progress in improving donor coordination. Backsliding in this area could condemn poor countries to the unhappy position of having to court myriad donors and wade through competing and conflicting regulations. And by going it alone, the United States would forgo a powerful opportunity to increase the impact of its funding by bringing other donors' resources to bear as part of multilateral initiatives. Moreover, although governments increasingly agree that progress in certain fundamental areas, such as stopping the spread of AIDS and providing basic education, is of paramount importance in all poor countries, a large but narrowly focused MCA might end up crowding out resources for global efforts to address these challenges. Finally, although the narrow focus may generate funds and encourage reform for a select group of top performers, the MCA's formula would fail to do the same for the large majority of low-income countries. A redesigned MCA with a broader vision and a second tier of funding would avoid these pitfalls while retaining the administration's important goals.

MISSED OPPORTUNITIES

The administration's MCA proposal would create an independent corporation to deliver new aid resources -- starting with $1.67 billion in 2004 and growing to $3.34 billion in 2005 and $5 billion by 2006 -- to between ten and fifteen highly qualified low-income countries. (Currently, the United States spends about $10 billion on international development and humanitarian assistance -- about one-half of one percent of the U.S. budget, or one-tenth of one percent of GDP.) Recipient governments would be those that rule justly, invest in their people, and encourage economic freedom. The administration announced in November 2002 a list of 16 criteria for judging recipients, ranging from trade policy and budget deficits to political rights and corruption to public expenditures in health and education. To qualify, countries would need to score above the median in at least half of the 16 categories; they would be automatically disqualified if they do not meet the corruption standards. For countries that did qualify, the MCA would provide substantial new funds, and perhaps even direct budget support, with fewer strings than traditional aid.

This approach would greatly benefit a small number of countries and provide strong incentives to reform for another small set of countries that are on the cusp of qualifying for MCA resources. It would also underscore to poor countries the importance of having a coherent overall policy framework for sustaining economic growth and could, by spotlighting success, change the debate over U.S. foreign assistance and lead to broader public support for such efforts. Although these considerations may justify experimenting with a narrow MCA approach, they do not justify devoting the entire increase in development assistance to a strategy that may leave out most poor nations and their citizens.

The MCA's current design does not address the fact that the large majority of poor countries will not only fail initially to qualify for aid but are many years away from realistically achieving eligibility. In Africa, only four countries -- Gambia, Ghana, Malawi, and Senegal -- are likely to qualify for the MCA in the first year, according to a recent analysis by Steven Radelet of the Center for Global Development. Another five would miss eligibility by only one criterion. Together these nine nations represent only 15 percent of the population of low-income African countries.

Yet many of the countries that do not meet all the MCA criteria could succeed in one area of development, such as AIDS prevention or funding education, either by constructing an effective national strategy or by having a capable minister or leader committed to reform. Some countries that are more than one criterion away from qualifying for the MCA have nonetheless made great strides in specific areas in recent years. Uganda has dramatically reduced HIV infection rates through a firm political commitment and a broad-based national effort. Tanzania has crafted a national education strategy that is among the strongest of the EFA fast-track countries. Ethiopia has increased the number of girls enrolled in primary school from 12 percent to 47 percent over the course of the 1990s, and this even in the face of famine.

The MCA would also do nothing for countries emerging from war. If a postconflict country were to make the sacrifices necessary to develop an ambitious, accountable national plan to get all its girls in school, stem the tide of AIDS within its borders, or rebuild its infrastructure to provide clean water and electricity throughout the country, it would seem an extremely worthy aid investment. Indeed, the recent quick return of hundreds of thousands of Afghan girls to school shows how much can be done in a postconflict country when a credible domestic commitment is combined with significant outside support. Yet the MCA, because of its stringent criteria, would provide little incentive or benefits for leaders in these circumstances.

In effect, the MCA would risk sending the following message to reform-minded ministers in all non-MCA countries: come back for support only when your government's entire house is in order. Such a signal could create frustration and even potential backsliding. But if the MCA challenged countries to excel in just one major area, it could inspire more countries to move toward meeting across-the-board standards.

DIVIDING, NOT UNITING

In recent years, there has been a groundswell of support for making major global progress on certain development challenges. Governments the world over increasingly recognize that providing universal education, especially to young girls, is perhaps the best investment that any country can make -- for it not only increases income and reduces poverty but improves health and overall standards of living. Likewise, investments to combat AIDS are critical in every country at every stage of development. When AIDS spreads unchecked, it impedes progress in any area of development. Tragically, HIV has infected more than five percent of the population in 21 African countries, 17 of which are more than one criterion away from MCA eligibility.

The MCA as currently proposed ignores these realities. By designating all funding to a handful of countries, it downplays the importance of increasing investments across countries in these priority areas. Prior to the MCA announcement, serious momentum had gathered behind global initiatives in education and fighting aids. The international community endorsed the Global Fund in 2001 and the program funded its first round of projects in April 2002. The global EFA commitment was catalyzed in 2000 at the World Education Forum in Dakar, Senegal, where 180 governments pledged that any poor country with a credible plan for educating all its children should receive sufficient resources. Since then, UNESCO and the World Bank have sought to craft clear guidelines for poor countries that demonstrate the commitment to reform necessary to receive donor support.

Just at the moment that these initiatives are taking off, the MCA could actually crowd out a serious U.S. commitment to such efforts. Indeed, it now appears likely that if the MCA is passed in the administration's proposed form, it will undercut any major new pledges to global efforts on AIDS and universal education. Advocates still argue that the United States must raise its annual commitment to the Global Fund from $250 million to $2 billion, and education activists at groups such as the Basic Education Coalition push for at least a $1 billion commitment to a coordinated global effort to meet the goals set in Dakar. Yet the prospect of Washington's approving an additional $3 billion in development assistance on top of the $5 billion already committed to the MCA seems highly unrealistic in light of the rise in deficits and the administration's promise to hold down non-homeland security spending.

Furthermore, the go-it-alone design of the MCA, although intended to increase the effectiveness of aid, would represent a new layer of bureaucracy for poor countries to navigate. It offers no clear process by which other bilateral or multilateral donors would collaborate. Considering the size and significance of U.S. action, the MCA could turn the recent trend toward increased coordination on its head and move the international community back in the direction of large bilateral aid initiatives. An uncoordinated, bilateral MCA would also miss the opportunity to leverage significant funding commitments from other nations for new development efforts. The United States generally sets the high-water mark with its contributions to new international development programs and this can inspire action by other donors, as happened after the U.S. commitment to the HIPC debt relief initiative.

Yet another reservation has to do with the absorptive capacity of recipient states. Many poor countries desperately need new money and could use it well, but it is not clear exactly how a small set of MCA countries will effectively absorb large increases in aid. Although the current MCA proposal would allow a board of directors to make some judgments beyond the strict criteria, the general understanding is that the stated funding requirements will drive eligibility for the MCA. And without flexibility to shift some resources to other countries outside of the eligibility criteria, policymakers will not have the opportunity to consider where aid effectiveness and absorptive capacity are the highest, and therefore where the efficiency of funding allocation would be maximized.

This structure could lead to several bad outcomes. One is that MCA countries would end up receiving more money than they can use well. Another is that undisbursed money would end up lying dormant as critical development needs went unmet in dozens of other developing countries. A third is that a share of funds would get shifted away from the very poorest countries to lower-middle-income nations that have a far better ability to attract outside resources and capital. Indeed the administration is already moving in this direction, by announcing that in 2006 MCA eligibility will be extended to countries with per capita incomes of almost $3,000, such as Egypt or Russia.

A TWO-TIERED SOLUTION

Devoting such a large share of new aid dollars to a narrow vision of the MCA will not produce the greatest returns for global poverty reduction. But if the United States broadened the MCA to include an additional tier of funding, it could expand the fund's impact to many more deserving poor countries while retaining the MCA's high standards and emphasis on effectiveness.

First, a two-tiered MCA would maintain the administration's important focus on rewarding "tier one" countries. The United States could still devote up to half of all MCA funds to a small set of countries that meet the administration's rigorous standards. This would retain the potentially powerful demonstration effect of backing a few "winners" with large new resources.

"Tier two" resources would be limited to countries with major national strategies. The United States could use the remaining MCA resources to extend funding to other low-income countries for national policy initiatives in areas such as education, health, clean water, and agriculture. The second tier would clearly distinguish itself from traditional U.S. assistance approaches by funding only broad policy initiatives or country-owned programs with clear potential to be scaled into nationwide programs. For example, a country that has made major progress in implementing a national strategy to provide clean water to all its citizens or setting up a nationwide aids-prevention program would be eligible for funding from the MCA's second tier, despite not meeting all of the tier-one criteria. This would provide incentives for many poor countries, including those emerging from conflict, to excel in priority areas and more quickly reach the tier-one requirements.

Moreover, the second tier would apply rigorous standards of accountability and transparency in areas where funds would be targeted. Although most low-income countries would be eligible to apply, the second tier would fund only those national programs that met clear accountability standards. Thus a country that was ineligible for the first tier could still receive support for a targeted aids-prevention program if it proved that it could effectively monitor and track budgets in that area, ensuring that additional funds went to the intended national strategy. Such rigorous budgetary monitoring should also include provisions for outside evaluation.

Finally, a portion of tier-two funding should go to global initiatives and help coordinate donor efforts. The second tier would harness the potential of initiatives such as the Global Fund and the EFA to help countries design broad national strategies. The United States should use MCA funding to promote progress in these country-owned programs. Although still part of a bilateral program, this approach would let the MCA coordinate its funding and standards with multilateral efforts and leverage additional donor support in the process. For example, the United States could transfer resources to a Global Fund project in a country that had designed an innovative aids-prevention program, even though that country has not fully implemented ambitious economic and market reforms. The United States could also make contingent contributions to the EFA and other global efforts and then work with other donors to ensure that funds were not disbursed until rigorous standards had been met. This type of contingent commitment would strengthen a global compact on development, making clear to poor countries that if they develop strong plans and meet high standards, they will not want for funding. But it would also provide assurance to the United States and other donors that funds will not be disbursed until it is clear that they will be used effectively.

The benefits of a two-tiered approach merit serious consideration by Congress and the administration as they take up the task of writing the MCA into law in the coming months. One option is to keep the MCA as is and add several billion dollars to meet the concerns addressed here. This move would certainly be justifiable; even a doubling of the current $5 billion MCA commitment would bring U.S. assistance, as a share of the economy, back to only 1987 levels -- still well below the average for the three decades preceding the 1990s.

But absent such an additional increase in development assistance, a two-tiered MCA would be the best way to ensure that the United States moves forward, not backward, in its efforts to support nations that want to reduce poverty and raise standards of living and hope among their citizens.