The Millennium Challenge Account: Congressional Consideration of a New Foreign Aid Initiative
Released: 2004-03-19T00:00:00

Most Recent Developments

On January 23, 2004, President Bush signed into law the Consolidated Appropriations Act,2004 ( P.L. 108-199 ) within which Congress authorized the creation of the Millennium ChallengeAccount and appropriated $994 million for FY2004. The MCA legislation, included in Division Dof the omnibus spending bill, resolved several key issues on which the House and Senate differed. The measure creates a new Millennium Challenge Corporation (MCC), headed by a CEO whoreports to the Board of MCC Directions, instead of the Secretary of State (Senate) or the President(House). The Board includes the Secretary of State (chairman), the Secretary of the Treasury, theU.S. Trade Representative, the USAID Administrator, the MCC CEO, and four others from listssubmitted by congressional leaders and nominated by the President. Low-middle income countriesmay participate in MCA programs beginning in FY2006, as proposed, but may not receive more than25% of MCA appropriations. The legislation creates a roughly 90-day period during which theCorporation will name the list of countries that will compete for MCA selection in the first year("candidate countries"), publish the methodology that will be used for identifying best performingcountries, seek public comment on the initiative, and consult with Congress. Following this reviewperiod, countries will be selected ("eligible countries") and invited to submit program proposals forfunding. This could take place as early as May 2004.

Introduction

In a speech on March 14, 2002, at the Inter-American Development Bank, President Bushoutlined a proposal for the United States to increase foreign economic assistance beginning inFY2004 so that by FY2006 American aid would be $5 billion higher than three years earlier. Hefurther pledged to maintain economic aid amounts at least at this level into the future. The fundswould be placed in a new Millennium Challenge Account (MCA) and be available on a competitivebasis to a few countries that have demonstrated a commitment to sound development policies andwhere U.S. support will have the best opportunities for achieving the intended results. These"best-performers" will be selected based on their records 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 that sustain an educated and healthy population.

Pursuing sound economic policies that stimulate enterprise and entrepreneurship -- promoting open markets, sustainable budgets, and opportunities for economicgrowth.

If fully implemented, the initiative would represent one of the largest increases in foreign aid spending in half a century, outpaced only by the Marshall Plan following World War II and the LatinAmerica-focused Alliance for Progress in the early 1960s. Administration officials characterize theMCA as representing the most comprehensive policy change ever in how the United States designs,implements, and monitors development assistance to low and lower-middle income nations. Inparticular, Executive officials emphasize the "results-based" aspect of the initiative in whichcountries will be selected based on past and current performance, and programs will be evaluatedon and required to show measurable achievements that impact favorably on economic growth andpoverty reduction.

Conditioning assistance on policy performance and accountability by recipient nations is not a new element of U.S. aid programs. Since the late 1980s at least, portions of Americandevelopment assistance have been allocated by the U.S. Agency for International Development(USAID) to some degree on a performance-based system. What is significantly different about theMCA is that the entire $5 billion money pool -- which is nearly twice the size of the FY2003USAID "core" development aid budget -- will be tied to performance and results. Moreover,program proposals will be based on national development strategies developed by the countriesthemselves, with a U.S. role limited to providing technical assistance in project design. Further, inanother major departure from past policy, the MCA is intended to focus exclusively on developmentgoals without being influenced by other U.S. foreign policy and geo-strategic objectives that oftenstrongly influence U.S. aid decision making. Nevertheless, while new details regarding countryeligibility, selection criteria, and organizational structure were announced in December 2003, manyissues have not yet been decided and remain under review by the Executive branch.

Congress plays a key role in the approval of the initiative by way of considering authorization and funding legislation, and in confirming the head, or CEO, of the Millennium ChallengeCorporation that manages the MCA under the President's plan. Congress will also maintaincontinuing oversight of the program as it is implemented and additional funding is sought insubsequent years. Among numerous policy issues for Congress raised by the MCA proposal were:

Country eligibility : Should the MCA target both low and lower-middle income countries, as proposed by the Administration, or should it focus exclusively on the poorestnations where the needs are the greatest and where access to other financial resources is limited? And, if both, how should funds be allocated between the two groups?

Performance indicators and selection process : Will the indicators and the methodology proposed by the Administration identify the "best performers"?

Implications for other U.S. development aid programs : How will the MCA affect global and country aid programs not part of the new initiative?

U.S. organizational structures: Is the proposed Millennium Challenge Corporation, with a staff of 100, the most appropriate structural model for managing the MCA? What are the implications for the U.S. Agency for International Development, the primarygovernment bilateral aid agency?

Program development and selection: What types of activities should the MCA fund and how will these programs be designed?

Legislative and funding matters: What should be the relationship between MCA authorizing legislation and current foreign aid laws and legislative practice? What are thebudgetary implications on the MCA?

Background of the Millennium Challenge Account Initiative

Context

The concept of the Millennium Challenge Account is based on the premise that economic development succeeds best where it is linked to sound economic and good governance policies,especially where these conditions exist prior to expanding resource transfers. Past failures ofeconomic aid provided by the United States and other international donors, some argue, have beencaused to a large extent by a lack of attention to performance and the requirement for measurableresults. (1) Executive branch officials say that theMCA abandons the process of basing aid allocationson promises by recipient governments to initiate policy changes in the future, and instead will makethose decisions based on achievements already made and policies that are currently working. (2)

This view has been joined by a growing body of literature in the late 1990s concluding that there was little relationship between the amount of development aid provided and success in raisingeconomic levels and reducing poverty. Rather, some researchers argued that foreign assistanceproduced the greatest impact where the recipient country had already adopted sound policies. (3) Others have concluded that international development assistance has largely failed and will continueto do so unless the donor community fundamentally shifts its focus to support real policy change. (4) Despite many development successes in such areas as agricultural production and childimmunization, by one calculation 97 countries receiving $144 billion (constant dollars) in U.S. aidsince 1980 had their median per capita gross domestic product (GDP) decline from $1,076 to $994by 2000. (5)

Also influencing the debate over the launch of a new foreign aid initiative are the terrorist attacks of September 11and an evaluation of their causes. There remain differences of perspectiveregarding a possible direct relationship between poverty and terrorism, especially given the fact thatmany terrorist leaders come from relatively wealthy backgrounds. But most agree that poverty canbe a contributing factor. President Bush, in announcing the MCA on March 14, 2002, madenumerous references to the war on terrorism, noting that "We also work for prosperity andopportunity because they help defeat terror." He further emphasized that although poverty does notcause terrorism, "poverty prevents governments from controlling their borders, policing theirterritory, and enforcing their laws. Development provides the resources to build hope and prosperity,and security." (6)

Accompanying this was a renewed interest in global development aid funding levels as governments, international institutions, and non-governmental organizations prepared for amid-March 2002 U.N.-sponsored International Conference on Financing for Development inMonterrey, Mexico. Conference proponents hoped the session would serve as a catalyst for donorsto increase aid commitments in order to achieve by 2015 the ambitious goal of reducing poverty byone-half relative to 1990. At the 2000 Millennium Summit, international leaders, including theUnited States, had pledged support for a set of specific targets, including those related to hunger,education, women's empowerment, child health, HIV/AIDS, and other infectious diseases, thatbecame known collectively as the Millennium Development Goals. A World Bank analysis, releasedFebruary 2002, estimated that to achieve these goals by 2015, donors would need to increasespending by $40 to $60 billion per year, or roughly double the amount provided in 2001. (7) As theMonterrey conference approached, international development advocates began pressing participatinggovernments to issue specific pledges that would help close this funding gap identified by the WorldBank.

Outlines of the MCA

Following the President's speech in March, an inter-agency team, including representatives from the National Security Council, Office of Management and Budget, State Department, USAID,and the Department of Treasury, met frequently to work out proposals to design and implement theU.S. initiative. The NSC managed overall policy development while the State Department tookcharge of outreach -- seeking input from the non-governmental community -- and the TreasuryDepartment assembled economic and governance indicators that would be used to determine eligiblecountries. The team drafted recommendations on many, but not all MCA issues, and after beingapproved by the Secretaries of State and Treasury, the proposals were forwarded to the President.

After making further modifications, on November 25 President Bush endorsed several key principles of the initiative. Thereafter, the process of writing legislation, deciding on budget levelsfor FY2004, and consulting with Congress began. On February 3, 2003, the President proposed $1.3billion for the MCA in FY2004, followed two days later by submission of a draft bill authorizing theinitiative. The requested legislation was introduced as H.R. 1966 and S. 571 , but ultimately enacted as part of the Consolidated Appropriations Act, 2004 (Division D of P.L.108-199 ).

While several important issues have been decided, both through enactment of authorizing legislation and through inter-agency discussions, others remain under review as the MCA frameworkevolves. These issues are highlighted below and discussed in more detail in the following sectionon the MCA and congressional consideration.

MCA features announced by the Administration. The Administration issued proposals on a number of key MCA elements, some of which wereincorporated into the enacted authorizing legislation:

Country eligibility. In the first year -- FY2004 -- countries that can borrow from the World Bank's International Development Association (IDA) with a per capita incomebelow $1,415 are eligible. The list will expand to 115 over the next two years to include allcountries with per capita GNI less than $2,935. (For complete list, see appendixB.)

Selection criteria and performance indicators. MCA participants will be selected based on their performance measured by 16 economic and political indicators. In mostcases, a score above the group median on the indicator would represent a passing "grade". The MCABoard of Directors will be guided by the statistical outcomes, but maintain some discretion over thefinal selection.

Corruption measure is "pass-fail". To be eligible, a country must score above the median on the corruption indicator, as compiled by the World BankInstitute.

Program development and submission. MCA programs will be "country-driven" in which participating country officials will design and submit project proposalsbased on national development objectives.

Types of programs supported. MCA programs will be available not only for government-sponsored projects, but for activities proposed and implemented by local governmentsand communities, civil society, and other private entities. National governments, however, wouldremain responsible for the program and be the party to sign a compact between the U.S. and thecountry. Moreover, according to Administration officials, all types of assistance -- budget supportfor government initiatives, infrastructure projects, and more targeted activities focused on specificsectors -- are available for consideration.

Organizational management of the MCA. The Administration asked and Congress approved the creation of a new entity -- the Millennium Challenge Corporation (MCC)-- that will be supervised by a Board of Directors chaired by the Secretary ofState.

FY2004 funding. The Administration proposed $1.3 billion for the MCA's first year and continues to support its pledge of $5 billion by FY2006. Congress, however, reducedthe FY2004 funding to $994 million.

MCA issues undecided within the Administration. Beyond some of these key decisions, other matters remain under discussion.

Number of countries participating. Because the MCA will be a "performance-driven" program, it is difficult to predict how many nations will qualify andparticipate. Administration officials have suggested, however, that the number will be relativelysmall -- perhaps less than 20 by the third year. It is also undecided whether all or only some of thecountries that qualify based on the performance indicators will receive MCA funding. The final listmay comprise selections from the pool of best performing countries or the selection could be basedon the quality of program proposals submitted by qualifying nations. Other options are also underreview.

Impact on USAID program objectives in MCA countries. MCA participants may or may not continue to receive regular development aid under existing USAIDprograms. If they do, it is unclear whether those activities will change focus in order to supportMCA projects. The role of USAID missions in MCA countries is also yet to be clearlystated.

Monitoring and accountability. Executive officials say that MCA programs will be closely monitored and scrutinized, perhaps by some independent auditing system, but theyhave not established plans or procedures.

Graduation or exit strategies. A main objective in providing an increased resource pool to help "jump-start" or accelerate a country's development process, is to set it on theroad toward graduation. What criteria to use to end programs in successful countries or how towithdraw from a non-performing MCA participant remain undecided.

The MCA and Congressional Consideration

As Congress considered MCA authorizing legislation and funding recommendations in 2003,and will later debate the confirmation of the MCC chief officer, followed by continuing oversightof program implementation, several key elements of the initiative have been, and will continue tobe closely examined. These will include matters that have already been decided within the executivebranch, as well as issues that remain under discussion.

Country Eligibility and Income Levels

One of the first questions addressed by the executive steering committee was where the income cutoff point should be drawn for purposes of defining potential MCA participants. The debatechiefly focused on whether only the poorest nations should be considered for MCA programs. Asnoted above, the Administration announced in late November 2002 that a pool of 115 countries,phased in over three years, would compete for MCA resources. They are grouped into three clustersaccording to income level and World Bank borrowing status, with a new cluster added to thecompetition each year corresponding to the anticipated rise in MCA resources. In FY2004, only the75 IDA-eligible countries with per capita incomes below $1,415 can compete, while 12 more willbe added the next year. (8) By FY2006, when $5 billionis planned for MCA programs, countries withper capita incomes between $1,415 and $2,935 -- 28 in number -- will be added. Since countriesabove $1,415 per capita income are likely to score higher on the eligibility indicators, the WhiteHouse further has decided to have separate competitions for the low and low-middle income groupsto avoid income bias.

Issue: Income eligibility. There emerged at the outset a relatively broad consensus within the U.S. development community that the MCA shouldfocus on IDA-eligible, low-income countries. (9) Fora policy aimed at promoting economic

growth and reducing poverty, mostagreed that it made sense to place emphasis where the greatest needs existed. By expanding thenumber and income level of MCA participants beyond IDA-eligible status, some argued, the amountof money available for the poorest nations would be reduced. Some also noted that the 28 memberlow-middle income group includes nations that maintain strong political and strategic ties with theU.S. -- Egypt, Jordan, Colombia, Turkey, and Russia. That would increase the possibility, or atleast the perception, that countries might be selected on criteria other than MCA performancemeasures. It may further tend to blur the distinction between MCA goals and objectives of other aidprograms, jeopardizing the unique approach of the MCA and the need for programmatic flexibility. (10) Achieving economic results as an objective has frequently taken a position secondary to strategicinterests in U.S. aid allocation considerations in the past.

In addition, some point out that the poorest countries have far less access to capital from private sources, making MCA resources even more valuable to them. According to one analysis, aid as apercent of gross national income (GNI) for IDA-eligible countries with per capita incomes below$1,415 totals 10.8% compared with 1.4% for the higher income group (below $2,935); gross privatecapital flows as a percent of GDP for the poorer IDA-eligible countries (below $1,415) is 6.9% whilethose between $1,415 and $2,935 receive 10.3%. Tax revenues and domestic savings as a percentof GDP among low-middle income countries are roughly double the level of those for IDA-eligibleborrowers below $1,415, thus providing a more expansive potential source of financing. (11)

Others, however, argue that low-middle income countries deserve equal consideration in a program intended to identify and partner with the "best-performers." In some cases, they assert,commitments to sound policies have enabled nations to move into the higher income range. If aprimary goal of the MCA is to maximize the effectiveness of aid resources, then non-IDA countriesshould be included. (12) In addition, countries fallingin the $1,415 - $2,935 per capita income range,while maintaining higher income levels, also have large numbers of people living in poverty. Thesecountries, with stronger institutions and better capacity may also be better positioned to apply MCAresources more effectively.

One argument of those favoring exclusive participation of countries below the $1,415 level -- that better-off economies would score higher on the eligibility indicators, raise the median standardsfor qualification, and squeeze out the poorest nations -- seems to be addressed by theAdministration. Based on a preliminary estimate of the median scores of each group, the medianwould be higher -- and in some cases significantly higher -- for 14 of the 16 indicators forlow-middle income countries compared with those below $1,415 GNI per capita. (13) In FY2006, whenthe 28 higher-income countries become eligible, they will be evaluated separately from the other 87,competing against each other to score above the group median on the 16 indicators. This wouldallow countries to qualify based on comparisons with their income-level peers. Whether theAdministration will divide MCA resources into two pots of money for each income group has notbeen determined. In any case, unless the Administration and Congress agree to increase the MCAbeyond the proposed $5 billion target, whatever number of low-middle income nations that qualifywill reduce the amount of resources that would otherwise be available for those below the $1,415level.

Congressional proposals to modify income eligibility. Reflecting the perspective that the MCA should remain focused on thepoorest countries, the Senate Foreign Relations Committee recommended in S. 1160 (as added to S. 950 ) to permit participation by low-middle income country in FY2006and beyond only if MCA funding exceeds $5 billion. If not, MCA programs could only be supportedin countries that fall below the "historical per capita income cutoff of the International DevelopmentAssociation," a level that is currently $1,415. Even in years when the MCA appropriation exceeds$5 billion, the Senate bill would limit funding to low-middle income participants to 20% of the totalamount. The Foreign Relations Committee further expressed its intention that MCA programs inthe low-middle income countries should focus on poor communities in those nations.

The House International Relations Committee, in H.R. 1950 , also limited to 20% the amount of MCA resources that could be allocated in FY2006 to low-middle income participants. But unlike the Senate, the House measure did not require an appropriation in excess of $5 billion forinclusion of the low-income group in FY2006. The Committee considered two amendments duringmarkup related to the income issue. The first, offered by Congressman Payne and approved by theHouse panel, would have required low-middle income countries that are selected for MCA grantsto make a contribution from their own resources to whatever MCA programs are funded. Thesecond amendment, proposed by Congressman Menendez, originated out of concern that few (7)Latin American nations would be eligible to compete for MCA resources in the first two years,despite large pockets of poverty in these countries. The Menendez amendment, which was defeated(10-24), would have made low-middle income nations, a group which includes nine from LatinAmerica eligible from the beginning. Similarly, Congressman Kolbe proposed an amendment duringHouse floor debate that would have allowed low-middle income countries to be eligible beginningin FY2005 rather than FY2006. The Kolbe amendment failed 110-313. While sympathetic to theconcerns expressed by sponsors of the amendment, those opposed to changing the income eligibilitystructure argued that resources diverted from Latin America and many other nations would come atthe expense of the world's poorest nations where the needs are greatest.

As enacted in Division D of P.L. 108-199 , the MCA authorizing legislation follows the earlier House and Senate plan of including only low-income countries in the program during FY2004 andFY2005. Beginning in FY2006, low-middle income nations, with per-capita income above $1,415,may also participate, but they can only receive 25% of the amount appropriated for the MCA in thatyear.

Performance Indicators and Selection Process

Executive branch decisions on which performance indicators to use have been guided by whether the data and methodology are transparent, publically available, accurate, and easy tounderstand. Another key factor is whether the data source provides full coverage for as manycountries as possible and is relatively current. Officials further sought to identify indicators thatwould be few in number but sufficient to reflect broad policy results in each of the three policycategories, and valid relationships between the indicators and economic growth and povertyreduction. Finding indicators that meet all of these requirements is difficult, and according to some,impossible. Gathering valid economic, social, and political statistics, especially in developingnations, has always been difficult, often resulting in significant gaps in coverage and long lag times. Gaining consensus on whether a given set of indicators accurately measures policy achievementsunfettered of institutional bias by whatever organization or individuals collect and interpret the datais also a major challenge.

As noted above, the Administration has settled on 16 indicators for measuring performance and determining country eligibility. As shown in Table 1, six fall within each of the ruling justly andencouraging economic freedom categories, while four will determine results in the area of investingin people. Sources include international institutions, such as the World Bank, IMF, and U.N., andnon-governmental and private organizations like Freedom House, Heritage Foundation, and theInstitutional Investor Magazine. National statistics will also be drawn upon where gaps occur, butnone of the data sets will be compiled by the U.S. government.

For aggregating country scores, the Administration decided to use a "hurdles" approach instead of adding up the results and ranking nations top to bottom. To qualify, a country must score above the median on half of the indicators in each policy area; in other words, a country's ranking must beabove the median of all 75 countries in the first year on three of the six indicators for ruling justlyand economic freedom, and two of the four for investing in people. The one exception to the medianstandard is the inflation indicator -- a country's inflation must be below 20 percent in order to passthat hurdle. Officials believe that the hurdle methodology will demonstrate that a country iscommitted in all three areas and more precisely identify policy weaknesses. In year three andbeyond, when low-middle income countries are added to the competition, there will be separateevaluations for countries below and above $1,415 per capita incomes so that higher income countrieswill not drive up the median and exclude poorer nations from qualifying.

Importantly, one indicator -- control of corruption -- will be a "pass-fail" test, in which any country scoring at or below the median on this measure will be disqualified regardless ofperformance on any of the other 15 indicators. Executive officials argue that since there are stronglinks between financial accountability and economic success, a strong commitment to fightcorruption must be demonstrated by all MCA participants.

Further, after passing all the required hurdles, a country's score will be evaluated by the MCC Board of Directors who will make the final recommendations to the President. The Board will begranted a degree of discretion in selecting the final participants, taking into account such things asmissing or old data, trends in performance, and other information that might reflect on a country'scommitment to economic growth and poverty reduction. Moreover, officials have yet to decidewhether to fund programs in all countries that qualify and pass the final review. Final selection, forexample, could hinge on the quality of program proposals submitted by the best performing nations,although other selection options are also under discussion. Presumably, the President will alsomaintain flexibility as to whether to agree with the Board's recommendations.

Congressional action on performance indicators. Measures considered in the Senate and House ( S. 1160 , as amended and incorporatedinto S. 925 ; and H.R. 2441 , as amended and incorporated into H.R. 1950 ) did not directly legislate the list of performance indicators to be used,thereby allowing the executive branch to apply the measures that it has recommended. Both,however, provided for advance congressional consultation and public awareness. S. 925 required that the list of proposed indicators be published in the Federal Register and on theInternet and that the Administration consider public comment prior to issuing the final determinationof the indicators. In this way, the Committee believed that the indicators could be refined andimproved.

H.R. 1950 required the Corporation's CEO to consult with congressional committees prior to establishing eligibility criteria and methodology and publish such criteria oncefinalized. Both bills further directed that country eligibility would be based on an evaluation ofperformance criteria that closely matched the 16 indicators listed in Table 1 below. In its report on S. 1160 , the Senate Foreign Relations Committee expressed its intent that the selectionbe based on development needs and performance, and not on immediate political considerations.

The enacted legislation, like earlier House and Senate bills, does not specify the specific performance indicators. In describing the criteria by which countries should be assessed, the MCAAct makes reference to the extent to which countries respect the rights of people with disabilities,promote the sustainable management of natural resources, and invest especially the health andeducation for women and girls. While none of the 16 indicators chosen by the Administrationdirectly address these three additional concerns, it is likely that MCC officials will review existingindicators or search for new performance measure in order to better evaluate progress on these threefactors added by Congress. The legislation further requires the Corporation to publish the eligibilitycriteria and methodology used for country evaluation on its website and in the Federal Register , andreceive public comment and congressional input prior to country selection decisions.

Table 1. MCA Performance Indicators

Issue: Association of performance indicators with economic growth and poverty reduction. Analysts will beexamining the set of 16 indicators to determine how well they predict successfuldevelopment outcomes. An initial assessment by the Center for Global Developmentsuggests that many of the indicators show a reasonable or strong relationship witheconomic growth, infant mortality, and literacy rates, although a few show weakassociations, especially in the economic freedom category. According to the Center'sanalysis, each of the six governance indicators maintains good or strong correlationto development outcomes. The measure of public primary education spending as apercent of GDP, however, is weakly associated with the three development standards. Three of the six economic freedom indicators -- trade policy, days to start a business,and three-year budget deficits -- are also found in the study as being weaklycorrelated with development achievements. (14)

Issue: Hurdles and median vs. aggregated ranking. Some argue that an aggregation of scores andtop-to-bottom ranking rather than the use of hurdles is a better way in which todetermine eligibility with an above-the-median score requirement. While theAdministration holds that passing half the hurdles in each of the three policy areasensures broad commitment to both economic growth and poverty reduction, it alsomeans that countries do not have to meet each of the 16 standards to qualify. Thisapproach departs from more traditional aid requirements in which recipients mustcomply with all conditions associated with a program framework, especially thoseof the World Bank, IMF, and in some cases U.S. aid agreements. Once a countrypasses a hurdle, there are limited incentives to keep improving in those areas. Forcountries that miss qualifying by a small margin, however, the incentive remains.

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Use of the median also in some cases complicates efforts for a country to passthe hurdle due to outcomes beyond its control. The median will change over time,sometimes because new countries are added to the pool, as will be the case inFY2005. In other instances, a country may improve on a particular indicator but stillnot pass the hurdle because other countries improve more significantly and push themedian higher. Conversely, a government could regress or remain stagnant over timebut pass a hurdle it had failed the previous year because the median drops. A numberof observers have suggested that instead of using the median, it would be better eitherto set specific, individual thresholds that would be relevant to each indicator or to useabsolute scores. (15)

A further issue in use of the median is that for three of the indicators -- political rights, civil liberties, and trade policy -- the range is relatively narrow for scoringcountry performance, resulting in many falling at the median. The Freedom Houseassigns scores on a 1-7 scale, while the Heritage Foundation uses a scale of 1-5. Forthe trade policy indicator, for example, 15 of the 75 IDA-eligible countries areassigned the median score of 4. Since a country must place above the median to passa hurdle, this eliminates a number of candidates with limited differentiation ofperformance.

Issue: Surprising country outcomes and modifying the indicators. Many have been surprised by the possibility thatcountries such as Vietnam and China might qualify, despite scoring near the bottomon half of the indicators for ruling justly. Both countries pass the hurdles forcorruption, rule of law, and government effectiveness, but have some of the worstscores in the categories of political rights, civil liberties, and voice andaccountability. Since they score above the median for three of the six indicators andpass the corruption measure, they would qualify, at least in the ruling justly category.

One analyst attributes this to the high degree of correlation among several indicators in a single category that tends to magnify existing data deficiencies. Whenhalf the indicators in a single category are strongly related to one another, and acountry scores well in those areas, the other indicators essentially become irrelevant. Egypt is also cited as an example of a country with a poor record on regulation andtrade, but would have passed the economic freedom grouping with data available inearly 2003 based on the strength of macroeconomic indicators. (16)

One modification to the current proposal that would address this potential weakness would be to make sure that highly correlated indicators represent less thanone-half the total cluster. In this way, a country would not pass one of the threecategories based on a strong showing in one respect but very poor standards for theother measures. Another alteration to the Administration's plan would be to add anadditional indicator in each category so that there would be an odd number ofmeasurements in each category. In a sense, the added element would become a"tie-breaker" in cases where the current indicators tended to cluster in two, evenlydivided, highly correlated groupings. One review of the MCA proposal argues thatthe initiative does not include sufficient attention to democracy issues because itincludes indicators in the ruling justly category that are better measures of economic,not political freedoms. This analysis recommends a shift of the corruption, rule oflaw, and government effectiveness indicators to the economic policy category. Under this scenario, countries like Vietnam and China would fail the ruling justly test. (17)

Issue: Data accuracy and availability. Due to the difficulty in collecting accurate data,especially those based on perceptions, a certain degree of error can be expected ineach of the 16 measurements. This cannot be overcome but is mitigated to someextent by the requirement of only having to pass half the hurdles in each policy area. But it appears most problematic for the pass/fail test of corruption. According to anassessment made by the authors of the corruption index, there is a large margin oferror and high degree of uncertainty for 25 countries that score slightly above orslightly below the median. Either cross-country data are not informative or sourcesdisagree on a country's corruption standing. Of the total of 25, 13 fall below themedian and would therefore be eliminated from further consideration, despite strongdoubt as to whether the data measured performance accurately. To overcome thispotential weakness, the authors recommend that MCA managers employ in-depthcountry diagnostics regarding governance performance for countries that fall near themedium -- the "yellow light countries." (18)

Missing data also pose challenges. A strict interpretation of the data would result in a failing grade on a hurdle where no figures were available. Only 87 of the115 possible MCA-eligible countries have been reported with regard to the indicator"days to start a business," although the number has increase from 63 a year ago. Forother indicators where data were incomplete or lagged, especially in the cases ofeducation and health spending as a percent of GDP, executive officials say they willrely on information collected at U.S. embassies in each country.

Issue: MCA Board of Directors discretionary authority. Allowing the Board some latitude to depart from thepurely statistical record will help address some of the data accuracy and availabilityproblems. But there appears to be divided opinion over how much discretion shouldbe permitted.

Arguing for broader flexibility, some note that countries that just miss qualifying, possibly because of the lack of data, could still be reconsidered andapproved. (19) In the case of "close-calls," the Boardcould examine trends over timeto assess if a borderline country was improving or falling back in performance, andmake appropriate adjustments. In order to maintain the integrity and transparency ofthe selection process, final judgments that deviate from the methodological base willneed to be clearly explained and closely examined. (20) This will be especiallyimportant in cases where the country with close strategic and political ties to theUnited States is included despite not meeting all the hurdle tests. The same will betrue should the President decide to reject a country that has recently opposed orrefused to support an important U.S. security-related policy. Others disagree,however, contending that any discretion on the part of the Board would inviteunwarranted political influence and undermine MCA effectiveness. (21) Anotheranalyst argues that one way to avoid undue foreign policy intrusion would be tochannel MCA funds through multilateral entities, such as the World Bank. (22)

Congressional proposals to modify Board of Directors discretion. As noted below, the Senate Foreign RelationsCommittee initially reported an MCA authorization bill that did not authorize thecreation of a Millennium Challenge Corporation, with a Board overseeing itsoperations. Instead, S. 1160 placed the MCA within the StateDepartment under the authority of the Secretary of State and gave the Secretary thepower to determine eligible countries through the evaluation of a government'scommitment to several factors in the three areas of ruling justly, economic freedom,and investing in people.

Subsequently, however, the Senate voted on July 9, 2003, to modify the MCC structure and the role of the Board of Directors by adopting revised text that waslargely based on a proposal offered by Senator Lugar ( S. 1240 ). Themodified arrangement, which was incorporated as Division C of S. 925 ,established a Corporation to be managed by a CEO. Under the Senate measure, theCEO would report to and be under the direct authority and foreign policy guidanceof the Secretary of State. S. 925 , as amended, further established aBoard of Directors, chaired by the Secretary of State, and grants the Board the powerto determine eligible countries by evaluating the commitment of a country todemocratic governance, economic freedom, and investments in people. This did not,however, appear to limit the Board's selections based solely on the results of theperformance indicators. In this way, the Senate measure seemed to permit a similardegree of discretion that the Administration's plan envisioned.

The House-passed measure ( H.R. 1950 ) was similar to the Senate bill in that it required eligible countries to have demonstrated a commitment tobolstering democracy, investing in health and education, and promoting soundeconomic policies, but did not specifically identify how such a commitment wouldbe determined, other than through the creation of eligibility criteria and amethodology.

As enacted, the MCA authorizing legislation follows the general themes of earlier House and Senate bills. "Eligible" countries are to be determined, to themaximum extent possible, by objective and quantifiable indicators measuring acountry's commitment to the three core policy goals of ruling justly, promotingeconomic freedom, and investing in people. The legislation directs that the selectionis to be based on the consideration of three factors: the extent to which the countrymeets or exceeds the eligibility criteria; the opportunity to reduce poverty andpromote economic growth in the country; and how much money is available to carryout MCA programs. This appears to provide substantial flexibility and discretionaryauthority in the selection process.

Where the House and Senate bills diverged, however, regarded who made the determination of eligibility and therefore, who would be in position to exercisediscretion in deviating from a strictly statistical evaluation. S. 925 , asamended on July 9, gave the Board of Directors authority to determine whether acountry is eligible, while H.R. 1950 placed the power with theCorporation's CEO. The enacted legislation gives this authority to the Board ofDirectors.

Implications for Other U.S. Assistance Programs

The MCA initiative will be an additional economic assistance tool of the United States, and is not intended to replace or substitute for any existing channel of U.S.foreign aid. It can be expected, therefore, that overall American aid will continue toserve multiple national interests and foreign policy goals, including security,humanitarian, multilateral, and commercial objectives. Administration officials havemade a commitment that the MCA will be in addition to existing aid activities andthat regular U.S. programs will continue even in MCA-participating countries. Nevertheless, because of the priority being placed on the MCA policy orientation andthe size of the financial investment, there almost certainly will be ramifications of thenew initiative for current programs. Foremost may be funding tradeoffs, especiallygiven rising budget deficits and the costs of fighting the war on terrorism. (Spendingissues are also discussed below in the section on legislation and budgets.)

Issue: Commitment to global initiatives. During the past year, some analysts have argued that aportion of the MCA should be dedicated to effective and results-oriented globalprograms operated on a multilateral basis. One concern is that the large amount ofresources directed to the MCA may limit the U.S. ability to maintain or expand uponcommitments to such activities as the Global Fund to Fight HIV/AIDS, Tuberculosis,and Malaria. Another worry is that soundly managed, high impact programs incountries with weak governance and poor corruption standards will miss out on theMCA opportunity to accelerate a process that is already making a contribution tolong-term economic growth and poverty reduction. Proponents of this view advocatea "two-tiered" approach to the MCA in which separate pools -- and perhapsmultiple pools -- are maintained to serve several types of activities. (23)

The trade-off for this approach would be that significantly fewer resources per country would be available, most likely reducing the impact of MCA assistance. Some also caution that multilateral programs, regardless of their merits, do notnecessarily have the same results-oriented performance requirements of the MCA,a fact that would undermine the main objective of the MCA. Increased resources areonly one important feature of the new initiative, and to many MCA advocates, themost significant feature by far is the goal of allocating the aid where it will have thegreatest impact and be most readily accounted for.

Issue: Policy coherence and USAID program goals in MCA countries. The Administration says it will maintain regulardevelopment aid programs in a country while it simultaneously launches a far largerMCA-designed activity. Executive officials have not said, however, how this mightaffect the shape and goals of continuing programs managed by USAID missions. Some may argue that regular aid objectives should be re-oriented to maintain policyconsistency with the MCA initiative and in some cases to help facilitate the corefocus of the larger pool of resources. Others, especially within USAID countrymissions, may question whether successful projects should be abandoned, with apotential negative impact on the target population. In perhaps the clearest statementto date, USAID Administrator Natsios told the House Foreign OperationsAppropriations Subcommittee that actions may vary from country to country. Henoted that USAID missions in MCA-selected countries would likely undertake astrategic review of their programs and may adjust projects to support the MCAcontract. In other cases, however, missions might continue high-priority activities,such as those combating HIV/AIDS or curbing trafficking in persons, or terminatecertain activities. (24)

Some of these same issues regarding policy coherence are being raised regarding the relationship between the MCA and other U.S. economic and trade tools aimed atpromoting economic growth in developing nations. One study, for example,concludes that there is very little overlap between countries likely to qualify for theMCA and those currently eligible for debt reduction under the Heavily Indebted PoorCountry (HIPC) initiative or for trade preferences under the African Growth andOpportunity Act. (25) Congressman Jim Kolbe,Chairman of the House ForeignOperations Subcommittee, the House panel with jurisdiction over funding the MCA,suggests that MCA qualifiers should get special consideration for expedited tradepreferences that would further accelerate economic growth possibilities. (26) Still otherswho support the MCA framework find fault with the Administration for not devisingsimultaneously an overall foreign aid strategy into which the MCA fills one ofseveral elements of a comprehensive policy. (27)

Beyond U.S. programs and policies, other foreign aid donors and institutions are expressing concerns that the MCA may be creating additional, and perhapscompeting performance goals to those that already exist. How MCA program goalsalign with the Millennium Development Goals is of particular concern.

Organizational Structures

One of the most contentious issues associated with the MCA policy review process has been and is likely to continue to be where the MCA programmanagement will be placed. This debate has raised issues discussed for many yearsconcerning under what auspices U.S. foreign aid policy should be designed,coordinated, and managed. Over the years, suggestions have ranged fromcoordination within the National Security Council, creation of umbrellaorganizations, like the ill-fated International Development Cooperation Agency, andmost recently the merger of such responsibilities into the State Department. Afterextensive debate during the mid-1990s, a decision was reached to make USAID, theprincipal U.S. government bilateral aid agency, totally independent, but to have itoperate under the guidance of the Secretary of State.

After considering numerous options, including the placement of the MCA as a separate unit with the State Department, the Administration proposed to create a newgovernment entity -- the Millennium Challenge Corporation -- to manage theinitiative. Given the innovative and non-traditional approach inherent in the MCAconcept, executive officials said it makes sense to establish a new entity to overseeits implementation. The Corporation, as proposed, would have a CEO, confirmedby the Senate, and a staff of no more than 100 that would be drawn largely from othergovernment agencies and serve for limited-term appointments. A Board of Directors,chaired by the Secretary of State and include the Treasury Secretary and OMBDirector, would oversee the MCC. Although it appears there is no precise existingmodel in the U.S. government, officials said that the MCC would most closelyresemble the Overseas Private Investment Corporation, an organization that promotesprivate American investment overseas, and the Commodity Credit Corporation, anarm of the Department of Agriculture that manages export credit guarantee programsfor the commercial sale of American agricultural goods. An important differencebetween these and the MCC, however, is the proposal to have a cabinet-memberBoard oversee the latter and make final recommendations.

Issue: The need for a new organization. Before agreeing on the MCC, the inter-agencysteering committee reportedly looked seriously at the option of creating a separateunit within the State Department to manage the MCA. One reason for rejecting thisproposal may have been the relative lack of experience of State Department staff inadministering aid programs. This was one of the central issues considered when thequestion of whether to fold USAID into the Department was under debate. Thistechnical shortcoming, however, could have been overcome by adopting the MCCprinciple of detailing aid experts from other agencies to staff the office. A broaderreason for not placing the MCA within the State Department, however, may havebeen a concern that it would be located too close to the center of the U.S. foreignpolicy apparatus that would limit the program's immunity from strategic and politicalinfluences. At a minimum, many observers believed, there would be a perceptionproblem -- whether true or not -- that the MCA did not truly represent a departurefrom the past aid entanglements with broad U.S. foreign policy interests.

At the same time, many groups encouraged the Administration to establish the MCA as an office within USAID, but apart from the normal operations of the agency. Various external groups have argued that USAID, with its 40 years of developmentexperience, maintained the knowledge, staff, and on-the-ground country presence tomost effectively administer and monitor the MCA. To place responsibilityelsewhere, they contend, would risk duplication of effort, competing priorities, andinconsistent policies. (28) Another, business-relatedorganization also opposes thecreation of a new institution. Rather it recommends the establishment of a "smallcore office" (unspecified as to where it would be placed) that would identify programpriorities and distribute the MCA funds to USAID and the Trade and DevelopmentAgency (TDA). (29)

Others are skeptical, however, that USAID is best suited to implement the MCA concept. The Agency is frequently criticized as encumbered with excessiveregulations, managed with poor financial systems and time-consuming planningcycles, and burdened by extensive congressional oversight. One analysis, afterweighing both the merits and disadvantages of placing the MCA within USAID,concluded that if the Administration wants the MCA to operate differently than USAID, it should create a new agency to manage it. (30)

Congressional proposals to modify the organization structure. Proposals considered by the Senate shifted positions onthe organizational issue as bills moved through the legislative process in 2003. S. 1160 , as reported by the Foreign Relations Committee in May 2003,did not authorize the creation of the MCC, as proposed by the President. Instead, thelegislation designated the Secretary of State as the coordinator of MCA assistanceand directed the Secretary to designate a coordinator within the State Department formanaging the program. The coordinator, who would be confirmed by the Senate,would have authority to develop the list of performance indicators, select eligiblecountries, and to coordinate MCA programs with other donors.

The Committee adopted this approach by approving an amendment offered by Senators Hagel and Biden (approved 11-8). The sponsors noted that in 1998Congress had consolidated two independent agencies -- USIA and ACDA -- in theState Department in order to give the Secretary more director authority over all toolsof U.S. foreign policy. To create a separate entity to manage what could become thecornerstone of American foreign assistance, they argued, would run counter to theserecent efforts to better integrate and coordinate foreign policy decision-making. Supporters further questioned what value the OMB Director would provide by beingon the Board of Directors, given that the Director is generally not assignedpolicy-making responsibilities.

The Administration strongly opposed the Committee's action to place the MCA in the State Department. At the markup session on May 21, 2003, Chairman Lugarread a letter from Secretary Powell underscoring the value of a new, independent, andcreative entity for managing this "new start" to U.S. foreign aid. The Secretary saidthat if this approach remains in the final bill, he would recommend that the Presidentveto the legislation.

Senator Lugar, who opposed the Biden-Hagel amendment, proposed an alternative structure in new legislation. S. 1240 , as introduced on June11, would create a Millennium Challenge Corporation, headed by a CEO who wouldreport to the Secretary of State. Senator Lugar intended that such an arrangementwould provide the Corporation with the same degree of independence and status asUSAID, but establish a chain of command that would permit the Secretary of Stateto exercise broad authority over the MCA. S. 1240 created a Board ofDirectors, made up of the Secretary of State (Chairman), the Secretary of theTreasury, the USAID Administrator, the U.S. Trade Representative, and the MCCCEO. The full Senate adopted the general approach proposed by Senator Lugar whenit voted on July 9, 2003, to incorporate a modified text of MCA authorizinglegislation into S. 925 , an omnibus foreign policy authorization bill. The approved text further strengthened the explicit relationship between theCorporation and the Secretary of State by adding that the CEO shall "report to andbe under the direct authority and foreign policy guidance of the Secretary." TheAdministration did not express objection to the revised legislation.

The House bill, H.R. 1950 , took a somewhat different approach than the modified Senate proposal that was closer to the Administration's position,although with some important differences. H.R. 1950 would create anew Millennium Challenge Corporation sought by the President, but altered thecomposition of the Board of Directors and, as noted above, the authority of theMCC's Chief Executive Officer. The Board would include the Secretary of State asChairman and the Secretary of the Treasury, as proposed, but deleted the Director ofOMB and added the USAID Administrator, the U.S. Trade Representative, and theCEO of the MCC. The bill also included four additional members, to be appointedby the President from a list submitted by the majority and minority leaders of theHouse and Senate. The Board would further include as non-voting ex-officiomembers, the CEO of OPIC, and the Directors of the Trade and DevelopmentAgency, Peace Corps, and OMB. The House measure further created an AdvisoryCouncil that would advise, consult, and make recommendations to the CEO andBoard of Directors for improving the MCA. The Council would include sevenCEO-appointed members from the non-governmental sector, including business,labor, private and voluntary organizations, foundations, public policy organizations,and the academic community.

As enacted (Title VI of the Foreign Operations Appropriations Act, 2004, as included in Division D of P.L. 108-199 ), the MCA authorizing legislation combinedapproaches found in both House and Senate bills. The statute creates an independentMillennium Challenge Corporation, headed by a CEO who is confirmed by theSenate and reports to the Board of Directors. The Board consists of the Secretary ofState (Chairman), the Secretary of the Treasury, the USAID Administrator, the U.S.Trade Representative, and the CEO. Four additional individuals will be on the Boardthat "should" be named by the President from lists of candidates supplied by theMajority and Minority leaders in the House and Senate. The enacted legislation,however, does not require Advisory Council as proposed by the House.

Issue: Role of MCC staff in managing and monitoring the MCA. One of the first concerns of aid managers isthe ability of a 100-staff organization to maintain proper oversight and accountabilitystandards over what will become a $5 billion program. By comparison, USAIDmaintains a staff of nearly 2,000 American direct-hires and several thousand morecontractors and foreign nationals based overseas to implement a roughly $8 billionprogram. Few would argue that a similar work-force is needed -- indeed, therewould likely be minimal support for a bureaucracy even half that size. But with acentral mandate of performance, results, and accountability, the MCA requires astrong monitoring capability. The Administration has mentioned the prospect of anoutside, independent auditing system, but the issue appears to remain unresolved.

Even though USAID will not manage the MCA, it is likely that its staff, especially those located in MCA participant countries, will play a supporting role invarious capacities. USAID Administrator Andrew Natsios has told his staff that theAgency's long record of best practices and experience will be required if the MCCis to be successful. But how this will operate in the field is an open question. Thereis concern among some USAID professionals that the time and attention of missionstaff to support administrative, contracting, and procurement needs of MCAprograms will diminish their ability to manage regular aid programs. And asmentioned above, how the current mission portfolio relates to MCA objectives isunclear.

Issue: Future of USAID. The creation of a new agency to manage the MCA is likely to be viewed by some as avote of no confidence in USAID. This may stimulate renewed debate over whetherthe USAID mandate should be modified -- perhaps limiting it to a strictlyhumanitarian aid agency -- or folding it into the State Department or the MCC itselfat some future date. USAID supporters are concerned that an MCA managed outsidethe principal U.S. development organization will establish a two-class aid systemwith USAID responsible for addressing the needs of the "weaker" performers whilethe main emphasis will transfer to the MCC. The potential impact on staffrecruitment and morale, and eventually resources, they believe, could be serious. Anargument could be made as well, however, that this provides an opportunity forUSAID not only to demonstrate its expertise as an aid organization and serve theMCC as a valued "consultant," but also can serve as incentive to review its ownoperations and correct some of the persistent problems identified by critics. (31)

Congressional proposals to modify USAID's role. During legislative consideration of MCA authorizing bills,Congress attempted to clarify the relationship between the MCC and USAID inefforts to minimize overlap and inconsistency of aid policies and operations. Asmentioned above, under both bills the USAID Administrator would become a votingmember of the Board of Directors. S. 925 , as amended, further directedCorporation staff posted overseas to coordinate the MCA program with the USAIDmission director in that country. The legislation also directed USAID to ensure thatagency programs would help prepare potential MCA participant countries to becomeeligible for assistance.

Similarly, H.R. 1950 gave USAID the lead role in assisting countries to become eligible in the future that had demonstrated a commitment todevelopment but failed to qualify based on the performance indicators (the so-called"near-miss" countries). Up to 15% of the amount authorized annually for the MCAcould be made available for such USAID programs. (The Senate measure alsoprovided up to 10% of annual MCA funds be available to countries that failed toqualify because of unreliable data or lack of performance on only one indicator,although the Corporation, not USAID would provide the assistance.) H.R. 1950 also directed the MCC to consult with USAID officialsregarding the contents of a contract -- or Compact -- between the U.S. and an MCAparticipant country, and required that the MCC and USAID coordinate their programsto the maximum extent possible. During House floor debate, Members adopted anamendment by Congressman Kolbe intended to further clarify USAID's role inproviding U.S. economic assistance. The language stated that the USAIDAdministrator shall report to the President "through, and operate under the foreignpolicy authority and direction of the Secretary of State." (32) The Kolbe amendmentalso authorized USAID to extend assistance to countries ineligible for MCA aid sothat they may become eligible, and permitted USAID to help in the evaluation,execution, and oversight of the MCA projects.

The enacted legislation authorizing the MCA (Title VI of the Foreign Operations Appropriations Act, 2004, as included in Division D of P.L. 108-199 ),specifically addresses the issue of the MCA and USAID relationship. Section 615of the measure requires the CEO to consult with the USAID Administrator, and thatUSAID must ensure that its programs play a primary role in preparing countries tobecome eligible for the MCA. As such, the legislation makes available up to 10%of the MCA appropriation ($99 million in FY2004) for assisting countries thatdemonstrate a "significant commitment" to the MCA requirements, but narrowlymiss qualifying. USAID may provide this support. The statute further requiresUSAID to seek to ensure that agency programs play a primary role in helping preparea country that has failed to qualify previously to better compete in the next selectionprocess.

Program Development and Selection

With broad agreement that development programs work best when they are designed and therefore "owned" by the host country and not imposed from outside,executive officials stress that MCA programs will be country-driven. Once a nationis identified as eligible, it will be invited to draft and submit program proposals forevaluation and selection through the MCC. Projects should directly support broadnational development strategies already in place, preferably constructed withextensive input from civil society. Since several of the possible MCA countries havealready designed such strategies as part of the Heavily Indebted Poor Country (HIPC)debt reduction initiative -- the Poverty Reduction Strategy Papers -- these PRSPsmight serve as the guiding framework for program goals where appropriate.

The Administration has outlined numerous types of programs that might be supported by the MCA: budget support for various community, sector, or nationalinitiatives; infrastructure development, commodity financing, training and technicalassistance, and capitalization of enterprise funds or foundations. Selection woulddepend on country-specific circumstances and would not be appropriate in all cases. For example, budget support programs would only be suitable where governmentsmaintain transparent budgeting, accounting, and control systems and have stronggovernance and anti-corruption records. Endowing enterprise funds or foundationsmight be appropriate where other alternatives are weak or where innovative ways offinancing development proposals appear attractive.

An eligible country could submit multiple proposals annually, some of which might take several years to implement. The MCC would create a contractualrelationship with selected countries and require the establishment of project performance goals so that progress could be closely monitored. Should performancefall behind or fail, the contract could be declared void and funding cut-off.

Issue: Detailing the types and targets of programs. One of the next steps for MCA planners will be to refinemore precisely the nature of programs the MCA will support, who the beneficiarieswill be, and what criteria will be used in making the selection. A number of groups,especially in the U.S. NGO community, have stressed the need to include programsthat will directly support non-governmental and civil society activities that mayoperate independently of the government. Some advocate that the MCC solicitproposals directly from private, non-governmental groups. (33)

The Administration appears to be receptive to the principle that MCA funded activities need not support only government-run or sponsored initiatives, but alsocould include projects operated directly by the private sector or NGOs. The draftlegislation submitted to Congress in February 2003 allowed the MCC to issue grantsto both private and public entities. What may be more problematic is the receipt ofproposals straight from these non-governmental sources. This might result in anawkward competitive relationship between government and non-governmentsubmissions, a competition that might be best settled by the country itself prior totransferring recommendations to the MCC. USAID Administrator Natsios told theHouse Appropriations Foreign Operations Subcommittee on May 21, 2003. thatwhile the MCA would likely include programs proposed by non-governmentalentities, the contract would need to be signed by the host government and that thegovernment would be responsible for managing and overseeing the project.

Another issue related to the types of programs eligible for MCA resources is the capacity of both the U.S. and participant countries to manage the projects. Budgetsupport, infrastructure, and commodity assistance most likely would be large-scaleactivities where substantial amounts of resources could be invested, thereby reducingthe total number of projects to be managed and monitored. Community-based orNGO projects, on the other hand, likely would be much smaller in size and fundingrequirements, but far more numerous in totality. While supporting the broadest arrayof development programs with MCA funds provides the maximum opportunities,U.S. policy makers will have to decide whether they are prepared to assumeresponsibility for a large number of projects in the MCA portfolio and the associatedmanagement, oversight, and accountability demands.

A key principal endorsed by numerous MCA proponents is that programs must be country-owned, designed by a broad spectrum of government and civil society. As noted above, some have suggested that PRSPs that have been developed by manypotential MCA countries could be used as the guiding framework in devisingprogram proposals. (34) Recognizing, however, thatmany MCA countries do not havesufficient capacity to design program proposals on their own, many suggest thatUSAID and others assist -- but do not control -- the development of programsubmissions. (35)

Congressional action on program issues. The enacted MCA authorizing legislation permits resourcesto be provided to a wide range of entities, including central governments, NGOs,regional and local governments, and private groups. Assistance may take the formof a grant, cooperative agreement, or contract with any of these eligible entities. Thelegislation requires that the United States enters into a "Compact" with a qualifyingcountry that describes the program to be funded, how it will be monitored, and howthe development goals will be achieved. The Compact cannot exceed a five yearcommitment. The measure specifically prohibits assistance for military purposes, forany project that would likely result in the loss of American jobs, for projects thatwould likely cause a significant environmental, health, or safety hazard, or forabortions or involuntary sterilizations. The legislation further sets out the process bywhich the CEO can suspend or terminate a Compact in cases where the country hasengaged in activities contrary to U.S. national security interests, has taken actionsinconsistent with the criteria for determining MCA country eligibility, or has failedto meet the requirements of the Compact.

Legislative and Funding Matters

The Administration submitted in early February 2003 draft MCA authorizing legislation and separately proposed $1.3 billion for the first year funding level. Program flexibility, as expected, was one of the key themes integrated throughout thedraft bill. Executive officials said that while the MCA should have its own statutorybase separate from existing laws, including the Foreign Assistance Act of 1961,current restrictions that prohibit U.S. assistance to countries would remain. Theseinclude a lengthy list of potential infractions including those related to human rights,drug production, terrorism, nuclear weapons transfers and testing, military coups,debt payment arrears, and trafficking in women and children, just to name a few.

In keeping with the desire for flexibility the draft legislation would make available MCA resources "notwithstanding any provision of law," but with a notableexception. Countries that currently cannot qualify for U.S. assistance under part 1of the Foreign Assistance Act of 1961 -- that part of the Act authorizing programsfor bilateral development aid, narcotics control, international disasters, the formerSoviet Union, and Central Asia, among others -- would remain ineligible for MCAfunds. However, if the President waived any prohibition under Part 1 for a particularcountry, that nation would then be eligible for MCA resources. (36)

Another area of flexibility highlighted in the draft bill concerned personnel and administrative authorities. The CEO of the Corporation would be granted authorityto establish and modify in the future a human resources management system withoutregard to existing laws governing Civil Service and Foreign Service activities,although certain provisions, including merit and fitness principles, cannot be waived. The draft submission further granted the CEO the authority to appoint and terminatepersonnel notwithstanding Civil Service and Foreign Service laws and regulations. The bill would also allow the MCC to transfer MCA resources to any U.S. agency,and would permit the Corporation to draw on the services and facilities of otherfederal agencies in carrying out the program.

On the funding question, the Administration expressed a commitment to a $5 billion MCA program by FY2006, although the pace at which resources approachthat figure would be influenced by anticipated demand as well as larger budgetaryconsiderations stemming from competing spending priorities, a growing deficit, andother possible policy initiatives. For FY2004, the President requested $1.3 billion,a figure less than one-third of the three year goal that some had expected. TheAdministration did not provide any projections for FY2005.

The President further made a commitment that MCA resources would not be drawn from existing aid programs, but would be in addition to those appropriations,although of course final decisions on appropriations are made by Congress. TheAdministration sought a large -- $2.6 billion, or 16% -- increase in ForeignOperations Appropriations programs for FY2004, including the MCA funds, butsome areas of the proposal, especially for bilateral development assistance programs,fell below current amounts for FY2003.

Issue: Flexibility and congressional directives and oversight. An issue that has been heatedly argued between Congressand all Administrations for many years has been the practice of congressionallegislative directives and earmarks in foreign aid authorization and spending laws. Executive officials argue that the excessive use of such directives, both formal andinformal, seriously erodes their ability to manage foreign policy and operate acoherent foreign aid program.

Most in Congress view the use of directives and earmarks, however, as a legitimate tool for congressional participation in setting foreign aid policy andspending priorities. Some Members point to congressional emphasis in recent yearson initiatives such as child health, basic education, and international HIV/AIDS,programs that both the Clinton and Bush Administrations subsequently came toembrace and support with higher budget requests. Without congressional pressurethrough earmarks, U.S. commitment and leadership on these policies would not existto the extent they do today, many argue. Moreover, some contend that these broad,sector allocation directives represent priority-setting decisions by lawmakers andreflect the appropriate and constructive power of Congress to manage the federal"purse." It is the far more targeted earmarks, they contend, benefitting specialinterests or specific organizations and firms, that are problematic from theExecutive's perspective.

The dispute over congressional foreign aid directives is unlikely to be resolved during any MCA debate. However, the distinctive nature of the MCA initiative provided the Administration with a different set of arguments against earmarks. Because of the demand-based, results-driven concept of the MCA, executive officialscontended that the traditional pattern of congressional directives -- specifyingfunding amounts for selected countries or activities, and placing restrictions oncertain operations -- would undermine the basic principles of the MCA concept. Legislative set-asides for a particular set of countries or for certain program activitieswould arguably undercut the transparent, objective process of selecting thebest-performers.

In settling these differences, one model to examine might be how Congress authorizes and funds other demand-driven programs in the annual Foreign Operationsappropriation bill. Since it is not known in advance who may request or requiresupport under programs such as the Export-Import Bank, the Trade and DevelopmentAgency, or international disaster assistance, Congress generally appropriates amountsthat are expected to be needed to meet the resource demands placed on theseactivities, with few or no set-asides for specific requirements. Authorizing laws forthese programs include some restrictions, but are generally not nearly as extensiveas those for regular bilateral economic and military aid programs. An importantdifference, however, between such programs and the MCA is that their purpose is farmore narrowly defined than that of the MCA.

Linking existing foreign aid eligibility requirements with the MCA drew broad support within Congress, since many of those requirements reflect fundamental socialand political values and were congressionally initiated. But the prospect of applyingto an MCA participant these overarching aid prohibitions, especially those thatrequire an Administration discretionary determination to trigger the aid cut-off, raiseda new set of issues. Would, for example, the extent to which the U.S. has a majorfinancial investment in a successful MCA project influence a decision on whether todeclare the government in violation of narcotics cooperation standards?

Congressional action on flexibility and oversight issues. For the most part, the enacted MCA authorizing act refrainsfrom earmarking, providing authorities consistent with MCA principals set out by theAdministration, and permitting the executive to implement the program with a degreeof flexibility. The measure authorizes assistance "notwithstanding any otherprovision of law." However, countries which are ineligible for American economicaid due to restrictions contained in the Foreign Assistance Act of 1961 or any otherprovision of law cannot be selected for MCA support. This provision will likelyeliminate consideration of a number of countries, although in most cases thesecountries would most likely be weak performers under the MCA selection criteria. Moreover, as noted above, assistance may not result in the loss of American jobs,displace U.S. production, pose a major environmental, health, or safety hazard, beused for military support, or finance abortions or involuntary sterilizations. Thestatute also adds several requirements aimed at strengthening congressional oversightof the MCA. The legislation requires the Secretary of State to post information aboutthe MCA in the Federal Register and on the Internet, and to submit an annual reporton MCA operations.

Issue: Funding and possible tradeoffs. Following submission of the FY2004 budget, MCAadvocates closely examined two funding issues: the size of the MCA request andproposals for other U.S. economic aid programs. Many believed that MCA resourcesshould and would grow in equal amounts of $1.67 billion per year to reach the $5billion total in three years. Conflicting Administration statements gave credibilityto the view that this was the intention, although officials have said more recently thatthis is not the case. For one reason, since the number of qualifiers the first year isstill far from certain, the funding requirements may be quite different from $1.67billion.

In addition, the budget environment was much different than it was in March 2002 when the President issued his policy statement. Budget deficits had risen,creating greater pressure to hold spending down in nearly all areas. Such pressuresare likely to continue throughout future budget debates, making the task ofaccommodating a new and large funding initiative more difficult.

One way to manage MCA increases would be to rearrange overall foreign aid spending priorities and reduce amounts elsewhere. But the President said theAdministration would not take that path. While the FY2004 budget request largelymaintained funding for other foreign aid programs at existing levels -- although witha few important exceptions -- congressional appropriators faced limitations in theirability to fully provide for both the MCA and other aid accounts. The effects of awar in Iraq and unanticipated foreign policy contingencies arising later in 2003created new resource demands. When Congress decided on different appropriationpriorities than the President and allocated a smaller amount to the Foreign Operationsfunding bill, it set the stage for direct trade-offs between the MCA and competingsecurity, economic, and humanitarian activities. In addition, the MCA was not theonly Foreign Operations program that was vying for increased spending for FY2004. The President's budget included several other new initiatives, including those foradditional HIV/AIDS resources, "topping up" the HIPC debt reduction initiative, acontingency funds addressing famine and conflict needs. While the overall requestfor Foreign Operations was well above FY2003 enacted levels -- up 16% -- thesenew initiatives accounted for most of the increase, leaving continuing programs witha more modest 3.6% rise.

Some foreign aid proponents were especially concerned about reductions in the President's FY2004 budget for development assistance and global health programs. Compared with the Administration's request for FY2003, the FY2004 budgetblueprint was the same -- a combined $2.96 billion total for these "core" bilateraldevelopment aid activities. But due to Congressional additions, the FY2003 levelshad increased to $3.23 billion, making the FY2004 request 8% less than enactedamounts for FY2003. Some argued that these, and similar reductions below FY2003appropriations for refugees, disaster, and food aid, broke the President's pledge tomake the MCA an additional source of funding. In order to reach a conclusion,however, one would have to know whether funds proposed for the MCA would bemade available for accounts supporting similar activities if this new initiative was notsubmitted. It is unclear that in the absence of the MCA or any of the other newinitiatives, that an equivalent amount of resources would have been made availablefor other bilateral economic aid programs.

Congressional proposals to modify MCA funding levels. Throughout the 2003 debate over MCA authorization andappropriation funding amounts, Congress struggled with the challenge of fullyfunding the President's $1.3 billion MCA request and addressing other foreign aidpriorities. Senate bills ( S. 1160 and S. 1426 ) authorizedand appropriated $1 billion for the MCA in FY2004. The authorization furtherprovided for $2.3 billion in FY2005 and $5 billion for FY2006. In the House, H.R. 1950 authorized $1.3 billion, while H.R. 2800 appropriated $800 million.

As enacted in Title VI of the Foreign Operations Appropriations Act, 2004 (included in Division D of P.L. 108-199 ), authorizations for MCA appropriations forFY2004 and FY2005 are set as "such sums as may be necessary." Elsewhere in thesame Act, Congress provides $1 billion for MCA appropriations in FY2004, $300million less than requested. (37) This appropriationreduction may affect the number ofcountries and program proposals selected for FY2004, and the pace at which theinitiative would move forward towards the $5 billion goal by FY2006.

Appendix A -- Comparison of Administration Proposal and Key Congressional Modifications

Throughout this report, Congressional recommendations to alter key elements of the President's MCA initiativeare discussed. The table belowsummarizes these changes.

a. The status of the Senate bill is based on S. 925 , the Foreign Affairs Act, Fiscal Year 2004, as amended during debate on July 9 and 10. S. 925 remains pending in the Senate. Previously, the Senate Foreign Relations Committee had approvedlegislation authorizing theMillennium Challenge Account in S. 1160 . A modified text of S. 1160 was subsequently incorporatedinto S. 925 as Division C on July 9. The House bill, H.R. 1950 , is also a combined foreign policy authorization measureto which earlier MCAauthorizing text was added. The House International Relations Committee had reported H.R. 2441 , whichwas incorporated, withmodifications, to H.R. 1950 , and passed by the House on July 16.

Appendix B -- U.S. Aid Compared to Other Major Donors and the Impact of the MCA

For many years, the United States has been criticized by other nations andinternational development organizations for not contributing enough to fight globalpoverty and promote economic growth. Although the United States was the largestprovider of Official Development Assistance (ODA) (38) until the early 1990s and wassecond to Japan in most years since until 2001, its contribution has been at or nearthe bottom of the list of international donors when measured as a proportion ofnational wealth.

Figure 1. ODA Performance 2002

The United States defends its record as a development aid provider, arguing that contributions to global poverty reduction should not be measured simply in terms ofaid transfers as a percent of GNP. (39) U.S. officialsnote that in dollar terms, AmericanODA has remained substantial, and is programmed on more favorable terms than thatof other donors. The United States, they emphasize, was a leading voice over thepast several years in the Heavily Indebted Poor Country (HIPC) debt initiative, beingthe first government to advocate 100% cancellation of bilateral debt owed by theworld's poorest nations. American charitable organizations and businesses providea significant proportion of annual aid transfers and private investment to thedeveloping world. Given the large amount spent by the United States on defense andthe security it provides to allies and friends around the world, American contributionsto global stability and a stable environment in which economic development can takeshape is much larger than ODA expenditures suggest, they contend.

In the coming years, if Congress continues to appropriate funds for the MCA initiative that are in addition to other ODA resources, the dollar value of U.S. ODAwill increase -- perhaps significantly -- especially if other new foreign aid programs,like the Global HIV/AIDS Initiative, proceed as planned. The Administration saysthat the MCA would add 50% to U.S. ODA contributions, and while that figure maynot be reached by FY2006, it is likely to be in the 25-40% range. But on the otherpoint of measurement -- ODA as a percent of GDP -- the impact will not be sodramatic, largely because MCA appropriations are likely to be very small relative tothe size of the U.S. economy and because of projected GDP growth estimates overthe next several years. According to current projections, assistance would rise fromthe 2002 level of 0.12% of GDP to 0.15%.

Appendix C -- Potential MCA Participants: Country Categories

IDA-eligible, per capita income $1,415 and below

MCA eligible FY2004 and beyond

* Gross National Income, dollars per capita, 2002. World Bank Annual Report, 2003.

** Precise data unavailable.

Per capita income $1,415 and below

MCA eligible FY2005 and beyond

Per capita income $1,416 - $2,935

MCA eligible FY2006 and beyond

* Gross National Income, dollars per capita, 2002. World Bank Annual Report, 2003.