The Millennium Challenge Account: influencing governance in developing countries through performance-based foreign aid.

• Author: Stubbs, Rebecca

ABSTRACT

The United States actively impacts the legal and political environments of developing countries through the Millennium Challenge Account (MCA). This new approach to foreign development aid presents both an incredible opportunity to encourage good governance as well as a serious danger of U.S. political agendas manipulating foreign aid to serve partisan interests. The MCA should seek to develop a nonpartisan strategy and focus primarily on pure rule of law, governance, and political freedom indicators and programming in order to maintain its current successes in improving the legal and policy environment of developing countries competing for MCA funding.

The direction and mandate of the Millennium Challenge Account is important for several reasons. Although some might consider the U.S. position on foreign aid to be a policy issue, much of law encompasses policy and the two simply cannot be divorced. The United States, in organizing U.S. foreign aid around specific indicators of what it considers "good governance," is necessarily impacting both the political and legal environments of developing countries seeking results-based foreign aid. Preliminary studies have documented the tangible impact of the MCA through the "MCA Effect." Developing countries are changing domestic laws and policies specifically in order to qualify for MCA funding. MCA funding disbursements, or "Compacts," are also directly influencing governance and the rule of law through various programming mandates.

As this paper will demonstrate, it is vital that the MCA develop a non-partisan approach to assessing countries and allocating foreign aid in order to maintain fair and consistent relationships with MCA countries. Past experience has demonstrated a tendency to use foreign aid for purposes of political expediency--such as rewarding political allies or shoring up failed states--rather than for purely development or poverty alleviation purposes. However, because the MCA has been designed to reward good governance regardless of U.S. interests, it is vital to maintain the separation between political expediency and the development purposes of the MCA. This can best be achieved by cultivating a more direct focus on governance reform and the rule of law, both in determining aid eligibility and in disbursing funds for development initiatives.

TABLE OF CONTENTS I. THE MILLENNIUM CHALLENGE ACT: RETHINKING U.S. FOREIGN AID II. THE HISTORY OF U.S. FOREIGN AID: DISAPPOINTING RESULTS AND NEW APPROACHES A. Research and International Consensus B. Altruism, Obligation, and the "Moral Imperative" in the United States C. National Security D. Failure of Previous Foreign Aid Vehicle and the Birth of MCA III. ANALYZING THE MCA CONCEPT A. The Conceptual Model of the MCA 1. Indicators and Country Selection 2. Funding Allocations--Compact Development and Threshold Programs B. Analyzing the MCA Concept Through a Partisan Framework 1. Indicators and Aid Selectivity a. Economic Freedom b. Investing in People c. Ruling Justly 2. The Partisanship of Compact Selection IV. CHALLENGES, AND THE NEED FOR REFORM A. Empirical and Anecdotal Successes Achieved by the MCA 1. The MCA Effect 2. MCA Compacts and Funding Allocations a. MCA Compacts b. Threshold Agreements B. Challenges Ahead: The Danger of Partisanship 1. Eligibility Indicators 2. Partisanship in Funding Allocations a. Board Discretion b. MCA Compacts C. Impact of a Partisan Foreign Aid Vehicle V. SOLUTION: DEVELOPING AN APOLITICAL ENTITY WITH A FOCUS ON GOVERNANCE AND THE RULE OF LAW A. Create an Apolitical Organization 1. A Model for Reform--Lessons from the World Bank 2. Repositioning the MCC as an Apolitical Organization B. Focus on Good Governance and the Rule of Law 1. Focus on Governance Indicators 2. Encourage Governance and the Rule of Law in MCA Compacts VI. CONCLUSION I. THE MILLENNIUM CHALLENGE ACT: RETHINKING U.S. FOREIGN AID

The ability of U.S. foreign aid to generate sustainable progress in developing countries has increasingly come into question as poverty and crisis continues to envelop much of the developing world. Despite increased levels of foreign aid spending, key indicators in the late 1990's pointed to negative trends in economic development in the poorest countries. (1) For instance, despite the U.S. contributing $144 billion of foreign aid to 97 countries between 1980 and 2000, the median gross domestic product (GDP) per capita in countries receiving aid declined from $1,076 to $994. (2) Former Secretary of State Colin Powell emphasized the problem of poverty and potential implications to the U.S. in his 2003 op-ed introducing the Millennium Challenge Act to the American public:

Half the human race--3 billion people--still lives on less than $2 a day. More than 1 billion do not have safe water to drink. Two billion lack adequate sanitation. Another 2 billion have no electricity. These aren't numbers but mere women and children who wake up each day to hunger, disease and despair. Lifting humanity out of poverty is one of the greatest moral challenges of the 21st century. And whether we, the world's greatest democracy, rise to that challenge carries profound implications for freedom, growth and security worldwide. (3) The Millennium Challenge Act of 2003 (the Act) attempted a novel approach to the problem of ineffective U.S. foreign aid. According to Daniel Kaufmann and Aart Kraay of the World Bank, "[the Act] represents a major policy shift by a donor in moving to an allocation criteria which places governance issues center stage, and which relies on highly transparent and objective empirical allocation criteria." (4) The Act appropriates foreign aid to specific infrastructure and economic development grants in developing countries showing a commitment to (1) governing justly, (2) investing in their people, and (3) encouraging economic freedom. (5) It allows eligible countries to design their own programs based on internally identified priorities and increases host-country ownership, accountability, and control. (6) The Act was passed by Congress and signed into law by President George W. Bush on January 23, 2004. (7) It established an independent government entity, the Millennium Challenge Corporation (MCC), and created the Millennium Challenge Account (MCA) as a clearinghouse for "results-based" foreign aid. (8) The original MCA, funded with $1 billion in FY2004, has been allocated approximately $7.5 billion as of FY2008. (9) As an example of the importance of the MCA in the foreign aid agenda, the MCA budget request constituted the single greatest line item increase in the foreign operations budget in FY2007. (10) However, funding allocations decreased substantially in FY2008 and FY2009, placing the MCA in a precarious position in light of shifting political power in Washington. (11)

Although co-sponsored by Republicans and Democrats in Congress, the Millennium Challenge Act was originally viewed by some critics as a Republican-led alternative to USAID, which was--and continues to be--primarily controlled by Democrats. (12) Several political and social factors led to the establishment of the MCA: the failure of compassion-based foreign aid to achieve measurable results; (13) research by prominent scholars on the benefits of results/governance-based foreign aid; (14) the Millennium Development Goals, adopted by 189 nations at the UN Millennium Summit in September 2000; (15) the terrorist attacks of 9/11 and the new Bush security strategy; (16) and the desire of politicians in both the Republican and Democratic parties to create a signature foreign aid entity. (17)

Now in its fourth year, the MCA faces serious pressure from a number of sources seeking to change the organizational structure and programming mandates of the MCA. (18) Compounding these challenges is the recent change in political control in Washington, D.C., following the 2008 Presidential election. With the MCA seen as a Republican initiative and still in its infancy in terms of producing tangible results, it will be a substantial struggle to maintain the autonomy of the program and the consistent inflow of Congressional funding needed to prove the success of the Millennium Challenge Act concept. (19) In fact, the MCC is already feeling the pains of political turmoil. A Democrat-controlled Senate Appropriations Committee recommended FY2009 MCC funding at $254 million, a life-support budget by any standard. (20) President Barack Obama's foreign policy plan involves consolidating all foreign aid initiatives--including the Millennium Challenge Account--under a "restructured, empowered, and streamlined USAID." (21) This action would not necessarily eliminate the programmatic importance of the MCA, but would significantly limit its autonomy and its perception of independence within the international aid community.

In spite of these challenges, the MCC has generated some incredible success stories. A recent Harvard study found that MCA candidate countries improve an average of 25% more than non-candidate countries on development indicator scores. (22) More importantly, countries continue that progress after receiving aid. (23) Madagascar, the first MCA Compact country, cut the cost of business registration by almost 60%, leading to a 26% increase in new business registrations in 2006. (24)

This Note will attempt to highlight ways in which the Millennium Challenge Account, seen primarily as a policy initiative, is actually influencing the regulatory environment and rule of law in developing countries. It will also make a case for de-politicizing the Millennium Challenge Corporation and focusing primarily on governing justly and improving the rule of law in order to fairly and impartially interact with MCA-eligible countries. This Note proceeds in five parts. Part II briefly touches on the history of U.S. foreign aid and the inception of the Millennium Challenge concept. Part III describes the MCA process and...