[Federal Register Volume 70, Number 173 (Thursday, September 8, 2005)]
[Notices]
[Pages 53392-53395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-17793]


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MILLENNIUM CHALLENGE CORPORATION

[MCC FR 05-16]


Report on the Criteria and Methodology for Determining the 
Eligibility of Candidate Countries for Millennium Challenge Account 
Assistance in FY 2006

AGENCY: Millennium Challenge Corporation.

SUMMARY: This report to Congress is provided in accordance with Section 
608(b) of the Millennium Challenge Act of 2003, 22 U.S.C.A. 7701, 
7707(b) (the ``Act''). The Act authorizes the provision of Millennium 
Challenge Account (``MCA'') assistance to countries that enter into 
compacts with the United States to support policies and programs that 
advance the prospects of such countries achieving lasting economic 
growth and poverty reduction. The Act requires the Millennium Challenge 
Corporation (``MCC'') to take a number of steps in determining the 
countries that, based on their demonstrated commitment to just and 
democratic governance, economic freedom and investing in their people, 
will be eligible for MCA assistance during Fiscal Year 2006. These 
steps include the submission of reports to the congressional committees 
specified in the Act and the publication of Notices in the Federal 
Register that identify:
    1. The countries that are ``candidate countries'' for MCA 
assistance during Fiscal Year 2006 based on their per-capita income 
levels and their eligibility to receive assistance under U.S. law and 
countries that would be candidate countries but for legal prohibitions 
on assistance (Section 608(a) of the Act);
    2. The criteria and methodology that the Board of Directors of MCC 
(the ``Board'') will use to measure and evaluate the relative policy 
performance of the candidate countries consistent with the requirements 
of Section 607 of the Act in order to select ``eligible countries'' 
from among the ``candidate countries'' (Section 608(b) of the Act); and
    3. The list of countries determined by the Board to be ``eligible 
countries'' for Fiscal Year 2006, including which of the eligible 
countries the Board will seek to

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enter into MCA compacts (Section 608(d) of the Act).
    This report sets out the criteria and methodology to be applied in 
determining eligibility for FY06 MCA assistance.

Changes to the Criteria and Methodology for FY 2006

    MCC has received constructive input on the indicators since the 
announcement of FY05's selection criteria and methodology. That input 
has been taken into account in creating the criteria and methodology 
for the selection of eligible countries for FY06.
    MCC has decided to make one change in the policy indicators for the 
FY06 selection process. In the FY05 Report, we signaled our intention 
to consider additional measures of government policies to encourage 
entrepreneurship and private sector ownership. For FY06, MCC will 
substitute an additional indicator from the World Bank Group's Doing 
Business report, Cost of Starting a Business, for a current indicator 
in this category, Country Credit Rating.
    MCC believes there are potentially significant gains from adopting 
this additional measure of the entrepreneurial environment. The 
proposed indicator meets all of our criteria for an indicator, 
including a strong empirical relationship to growth. Moreover, we 
believe there are potentially significant gains in terms of country 
reforms from adopting another indicator from the Doing Business report 
because the indicators in it tend to be highly actionable. For example, 
we are currently using the Days to Start a Business indicator and have 
seen significant improvements in the median score for low income 
countries: from 62 days in 2002 to 45 days in 2005. According to the 
World Bank Group, 80% of the business start-up reforms that they have 
observed are directly attributable to the incentive effect of the MCA.
    The strength of this new indicator is that countries can easily 
identify areas that require improvement and make quick administrative 
changes that produce immediate improvements. Governments can lower the 
cost of business start-up by creating single access points, making 
registration electronic, introducing temporary business licenses, 
eliminating statutory time limits and mandatory use of notaries and 
judges, standardizing paperwork, and eliminating non-essential fees, 
transfer taxes, stamp duties, as well as payments to property 
registries, notaries, public agencies and lawyers. In some cases a 
country can dramatically improve its score by simply reducing or 
eliminating notary fees that frequently are commensurate with the 
average citizen's annual income.
    We are substituting Cost of Starting a Business for Country Credit 
Rating, a current indicator which we see as problematic. First, all of 
our indicators should be policy-linked and measure policies that a 
government can change. The existing literature on the determinants of 
country credit rating suggests that this metric is influenced not only 
by domestic policies (e.g., inflation, reserve holdings, current 
account deficits, export growth, debt-GDP ratios, corruption, rule of 
law, and default risk) but also by many exogenous factors (e.g., 
initial income, international interest rates, growth rates in 
industrialized nations, commodity price fluctuations, export 
composition). It is therefore not clear how quickly and to what degree 
domestic policy changes will affect this variable. In addition, this 
indicator appears to have more of an income bias than other indicators 
MCC is using.
    Potential Future Changes Under Consideration: In addition to the 
change identified above, there are several potential future changes to 
the indicators that we will explore for the FY07 process. We are 
signaling these potential changes in order to solicit comments from the 
public and to provide countries an opportunity to evaluate their 
performance in these areas in advance of any such future changes in the 
selection process.
    We hope that by highlighting our intention to look for better and 
more comprehensive indicators we will stimulate interest in improving 
the available data. In assessing new indicators, we will favor those 
that: (1) Are developed by an independent third party, (2) utilize 
objective and high-quality data, (3) are analytically rigorous and 
publicly available, (4) have broad country-coverage and are comparable 
across countries, (5) have a clear theoretical or empirical link to 
economic growth and poverty reduction, (6) are policy-linked, i.e. 
measure factors that governments can influence within a two to three 
year horizon, and (7) have broad consistency in results from year to 
year.
    A summary of the results of research undertaken throughout the past 
year and the identification of potential future changes to the 
selection criteria and methodology follows:
    Encouraging Economic Freedom: Trade Policy: In the FY05 Report, MCC 
signaled exploration of a more comprehensive measure of trade barriers. 
MCC has not identified a more comprehensive measure with good country 
coverage and which is publicly available and we will continue to 
research these issues for a possible change in FY07.
    Natural Resources Management: MCC has launched a public process led 
by MCC Board Member Christine Todd Whitman in search of a natural 
resource management indicator. MCC has sought broad input from the 
academic community, public and private sector practitioners, and 
researchers at think tanks and NGOs. We have consulted with 
environmental experts from across the country, who have provided 
extremely valuable guidance to MCC, and have published a public 
``request for ideas'' for an indicator or index. We have enlisted the 
help of six experts to individually rate proposals and submit 
independent evaluations to MCC, and will discuss with the Board later 
this year whether we have succeeded in identifying a potential 
indicator for FY07. In the interim, MCC will provide the Board with 
quantitative and qualitative supplemental information in the natural 
resource management area.

    (Note: In FY05, we signaled MCC's intention to consider a 
reduction in the threshold on the Inflation indicator from 15% to 
10% in FY06. However, we have not found credible evidence to support 
a further reduction, and MCC will continue to apply the 15% 
threshold.)

    Investing in People: Women's and Children's Health: In FY05, MCC 
signaled an interest in finding additional ways to measure investments 
in people, particularly with respect to women and children, in 
accordance with the legislation. In particular, we singled out Skilled 
Attendants at Birth (SBA) (a proxy for maternal mortality which 
measures births attended by medically-trained midwives, nurses or 
doctors) for potential use in FY06. After extensively reviewing the 
data, the methodology, and the literature on skilled birth attendants, 
we cannot adopt this indicator for inclusion as an indicator in the 
FY06 selection process due to poor data quality and lack of adequate 
country coverage. We remain interested in identifying measures of 
government policies that support women's and children's health, 
however, and will look for improvements in country coverage, frequency, 
definitional consistency, and data quality in the SBA indicator. MCC 
will continue to explore additional and better ways to measure 
investments in people, particularly with respect to women and children, 
for use in the selection criteria in future years.

[[Page 53394]]

Criteria and Methodology

    The Board will select eligible countries based on their overall 
performance in relation to their peers in three broad policy 
categories: Ruling Justly, Encouraging Economic Freedom, and Investing 
in People. Section 607 of the Act requires that the Board's 
determination of eligibility be based ``to the maximum extent possible, 
upon objective and quantifiable indicators of a country's demonstrated 
commitment'' to the criteria set out in the Act. For FY06, there will 
be two groups of candidate countries--low-income countries and lower-
middle income countries. Low-income candidate countries refer to those 
countries that have a per capita income equal to or less than $1575 and 
are not ineligible to receive United States economic assistance under 
part I of the Foreign Assistance Act of 1961 by reason of the 
application of any provision of the Foreign Assistance Act or any other 
provision of law. Lower-middle income candidate countries are those 
that have a per capita income between $1,575-$3,255 and are not 
ineligible to receive United States economic assistance.
    The Board will make use of sixteen indicators to assess policy 
performance of individual countries (specific definitions of the 
indicators and their sources are set out in Annex A). These indicators 
are grouped for purposes of the assessment methodology under the three 
policy categories as follows:

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           Ruling Justly:                 Encouraging economic freedom:             Investing in people:
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1. Civil Liberties                    1. Cost of Starting a Business        1. Public Expenditures on Health as
2. Political Rights                   2. 1-year Consumer Price Inflation     Percent of GDP.
3. Voice and Accountability           3. Fiscal Policy                      2. Immunization Rates: DPT3 and
4. Government Effectiveness           4. Trade Policy                        Measles.
5. Rule of Law                        5. Regulatory Quality                 3. Public Primary Education Spending
6. Control of Corruption              6. Days to Start a Business            as Percent of GDP.
                                                                            4. Girls Primary Education
                                                                             Completion Rate.
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    In making its determination of eligibility with respect to a 
particular candidate country, the Board will consider whether a country 
performs above the median in relation to its peers on at least half of 
the indicators in each of the three policy categories and above the 
median on the corruption indicator. One exception to this methodology 
is that the median is not used for the Inflation indicator. Instead, to 
pass the Inflation indicator a country's inflation rate needs to be 
under a fixed ceiling of 15%. The indicator methodology will be the 
predominant basis for determining which countries will be eligible for 
MCA assistance. In addition, the Board may exercise discretion in 
evaluating and translating the indicators into a final list of eligible 
countries. In this respect, the Board may also consider whether any 
adjustments should be made for data gaps, lags, trends, or other 
weaknesses in particular indicators. Likewise, the Board may deem a 
country ineligible if it performs substantially below the median on any 
indicator and has not taken appropriate measures to address this 
shortcoming.
    Where necessary, the Board may also take into account other 
quantitative and qualitative information to determine whether a country 
performed satisfactorily in relation to its peers in a given category. 
As provided in the Act, the CEO's report to Congress setting out the 
list of eligible countries and identifying which of those countries the 
MCC will seek to enter into Compact negotiations with will include a 
justification for such eligibility determinations and selections for 
Compact negotiation.
    There are elements of the criteria set out in the Act for which 
there is either limited quantitative information (e.g., rights of 
people with disabilities) or no well-developed performance indicator 
(e.g., sustainable management of natural resources). Until such data 
and/or indicators are developed, the Board may rely on supplemental 
data and qualitative information to assess policy performance. For 
example, the State Department Human Rights report contains qualitative 
information to make an assessment on a variety of criteria outlined by 
Congress, such as the rights of people with disabilities, the treatment 
of women and children, worker rights, and human rights. Similarly, as 
additional information in the area of corruption, the Board may 
consider how a country scores on Transparency International's 
Corruption Perceptions Index as well as on the defined indicator.
    The Board's assessment of a country's commitment to economic 
policies that promote the sustainable management of natural resources 
may make use of quantitative and qualitative information such as access 
to sanitation, deforestation, conservation of land and marine 
resources, land tenure institutions, and protection of threatened and 
endangered species. MCC has launched a public process to identify a 
suitable potential indicator.

Relationship to Legislative Criteria

    Within each policy category, the Act sets out a number of specific 
selection criteria. As indicated above, a set of objective and 
quantifiable policy indicators is being used to establish eligibility 
for MCA assistance and measure the relative performance by candidate 
countries against these criteria. The Board's approach to determining 
eligibility ensures that performance against each of these criteria is 
assessed by at least one of the sixteen objective indicators. Most are 
addressed by multiple indicators. The specific indicators used to 
measure each of the criteria set out in the Act are as follows:
    Section 607(b)(1:) Just and democratic governance, including a 
demonstrated commitment to--
    (A) Promote political pluralism, equality, and the rule of law; 
Indicators--Political Rights, Civil Liberties, Voice and Accountability 
and Rule of Law
    (B) Respect human and civil rights, including the rights of people 
with disabilities; Indicators--Political Rights and Civil Liberties
    (C) Protect private property rights; Indicators--Civil Liberties, 
Regulatory Quality and Rule of Law
    (D) Encourage transparency and accountability of government; and
    Indicators--Political Rights, Civil Liberties, Voice and 
Accountability, and Government Effectiveness
    (E) Combat corruption.
Indicators--Civil Liberties and Control of Corruption
    Where necessary the Board will also draw on supplemental data and 
qualitative information, including the State Department's Human Rights 
Report and Transparency International Corruption Perception's Index.
    Section 607(b)(2): Economic freedom, including a demonstrated 
commitment to economic policies that--
    (A) Encourage citizens and firms to participate in global trade and 
international capital markets; Indicators--Fiscal Policy, Inflation, 
Trade Policy, and Regulatory Quality

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    (B) Promote private sector growth and the sustainable management of 
natural resources; Indicators--Inflation, Days to Start a Business, 
Cost of Starting a Business, Fiscal Policy, and Regulatory Quality
    (C) Strengthen market forces in the economy; and Indicators--Fiscal 
Policy, Inflation, and Regulatory Quality
    (D) Respect worker rights, including the right to form labor 
unions. Indicators--Civil Liberties
    Where necessary the Board will also draw on supplemental data and 
qualitative information including the State Department's Human Rights 
Report, access to sanitation, deforestation, conservation of land and 
marine resources, land tenure institutions, and protection of 
threatened and endangered species.
    Section 607(b)(3): Investments in the people of such country, 
particularly women and children, including programs that--
    (A) Promote broad-based primary education; and
    Indicators--Girls' Primary Education Completion Rate and Public 
Spending on Primary Education.
    (B) Strengthen and build capacity to provide quality public health 
and reduce child mortality. Indicators--Immunization and Public 
Spending on Health.

Annex A: Indicator Definitions

    The following 16 indicators will be used to measure candidate 
countries' adherence to the criteria found in Section 607(b) of the 
Act. The indicators are intended to assess the degree to which the 
political and economic conditions in a country serve to promote broad-
based sustainable economic growth and thus provide a sound environment 
for the use of MCA funds. The indicators are not goals in themselves; 
rather, they measure policies that are necessary conditions for a 
country to achieve broad-based sustainable economic growth. The 
indicators were selected based on their relationship to growth and 
poverty reduction, the number of countries they cover, their 
transparency and availability, and their relative soundness and 
objectivity. Where possible, the indicators rely on indices of 
performance developed by independent sources.
Ruling Justly
    (1) Civil Liberties: A panel of independent experts rates countries 
on: freedom of expression, association and organizational rights, rule 
of law and human rights, and personal autonomy and economic rights. 
Source: Freedom House.
    (2) Political Rights: A panel of independent experts rates 
countries on: the prevalence of free and fair elections of officials 
with real power; the ability of citizens to form political parties that 
may compete fairly in elections; freedom from domination by the 
military, foreign powers, totalitarian parties, religious hierarchies 
and economic oligarchies; and the political rights of minority groups. 
Source: Freedom House.
    (3) Voice and Accountability: An index of surveys that rates 
countries on: ability of institutions to protect civil liberties, the 
extent to which citizens of a country are able to participate in the 
selection of governments, and the independence of the media. Source: 
World Bank Institute.
    (4) Government Effectiveness: An index of surveys that rates 
countries on: The quality of public service provision, civil services' 
competency and independence from political pressures, and the 
government's ability to plan and implement sound policies. Source: 
World Bank Institute.
    (5) Rule of Law: An index of surveys that rates countries on: the 
extent to which the public has confidence in and abides by rules of 
society; incidence of violent and non-violent crime; effectiveness and 
predictability of the judiciary; and the enforceability of contracts. 
Source: World Bank Institute.
    (6) Control of Corruption: An index of surveys that rates countries 
on: The frequency of ``additional payments to get things done,'' the 
effects of corruption on the business environment, ``grand corruption'' 
in the political arena and the tendency of elites to engage in ``state 
capture.'' Source: World Bank Institute.
Encouraging Economic Freedom
    (1) Cost of Starting a Business: The Private Sector Advisory 
Service of the World Bank Group works with local lawyers and other 
professionals to examine specific regulations that impact business 
investment. One of their studies measures the cost of starting a new 
business as a percentage of per capita income. Source: World Bank 
Group.
    (2) Inflation: The most recent 12 month change in consumer prices 
as reported in the IMF's International Financial Statistics or in 
another public forum by the relevant national monetary authorities. 
Source: Multiple.
    (3) Fiscal Policy: The overall budget deficit divided by GDP, 
averaged over a three-year period. The data for this measure is being 
provided directly by the recipient government and will be cross checked 
with other sources and made publicly available to try to ensure 
consistency across countries. Source: National Governments and IMF WEO.
    (4) Days to Start a Business: The Private Sector Advisory Service 
of the World Bank Group works with local lawyers and other 
professionals to examine specific regulations that impact business 
investment. One of their studies measures how many days it takes to 
open a new business. Source: World Bank Group.
    (5) Trade Policy: A measure of a country's openness to 
international trade based on average tariff rates and non-tariff 
barriers to trade. Source: The Heritage Foundation's Index of Economic 
Freedom.
    (6) Regulatory Quality Rating: An index of surveys that rates 
countries on: the burden of regulations on business, price controls, 
the government's role in the economy, foreign investment regulation and 
many other areas. Source: World Bank Institute.
Investing in People
    (1) Public Expenditure on Health: Total expenditures by government 
at all levels on health divided by GDP. Source: National Governments.
    (2) Immunization: The average of DPT3 and measles immunization 
rates for the most recent year available. Source: The World Health 
Organization WHO.
    (3) Total Public Expenditure on Primary Education: Total 
expenditures by government at all levels of primary education divided 
by GDP. Source: National Governments.
    (4) Girls' Primary Completion Rate: The number of female students 
completing primary education divided by the population in the relevant 
age cohort. Source: World Bank and UNESCO.

    Dated: September 2, 2005.
Jon A. Dyck,
Vice President & General Counsel, Millennium Challenge Corporation.
[FR Doc. 05-17793 Filed 9-7-05; 8:45 am]
BILLING CODE 9210-01-P