Skip to content

Incentives and Capacity at the MCC

In March 2002, the Bush administration announced a new approach to development called the Millennium Challenge Account (MCA). Lauded in the press as “an audacious attempt by the Bush administration to rewrite the rules of foreign development assistance,” the MCA was designed to be free from the constraints of the contradictory and sometimes self-defeating Congressional earmarks that have historically reduced or crippled other organizations’ ability to react efficiently, as well as the morass of legislation that makes many government bureaucracies cumbersome and inefficient. The MCA was to be less constrained by American foreign policy considerations and thus freer to dedicate its time and resources more specifically to promoting transformative change. Since its inception in January 2004, the MCA and the corporation that manages that account, the Millennium Challenge Corporation (MCC), has done just that by emphasizing performance and competition, and by working only with nations that have already established the preconditions necessary to use aid wisely.

This article first appeared in the 2006 edition of SAIS Perspectives at Johns Hopkins School of Advanced International Studies (SAIS).

The MCA: A New Development Paradigm

In March 2002, the Bush administration announced a new approach to development called the Millennium Challenge Account (MCA). Lauded in the press as “an audacious attempt by the Bush administration to rewrite the rules of foreign development assistance,” the MCA was designed to be free from the constraints of the contradictory and sometimes self-defeating Congressional earmarks that have historically reduced or crippled other organizations’ ability to react efficiently, as well as the morass of legislation that makes many government bureaucracies cumbersome and inefficient. The MCA was to be less constrained by American foreign policy considerations and thus freer to dedicate its time and resources more specifically to promoting transformative change. Since its inception in January 2004, the MCA and the corporation that manages that account, the Millennium Challenge Corporation (MCC), has done just that by emphasizing performance and competition, and by working only with nations that have already established the preconditions necessary to use aid wisely.

MCC imposes eligibility criteria that limits aid to only those countries that have demonstrated a commitment to ruling justly, promoting economic freedom, and investing in people, three broad criteria measured using sixteen third party (non US government) indicators in a process made open to the public. These three categories of policies were not chosen randomly but rather were selected on the basis of their clear empirical correlation with economic growth and thus the reduction of poverty. The MCC set forward from day one the principles that would guide the selection and approval of programs for funding: host country ownership, overcoming of key impediments to economic growth and poverty reduction, and integrating monitoring and evaluation upfront so that programs lead to clear and measurable results.

MCA in Theory

In theory, once a country becomes eligible for MCA funding—which is to say once the sixteen policy indicators that track the country’s commitment to growth-oriented policies show the country has taken clear steps to establish the rule of law and participatory governance, invest in health and education, and provide the context for private sector-led development—the MCC’s board may select that country for inclusion in the program. The Board makes its selection annually. If selected, that country is free to develop and present a proposal for an economic development program that would mitigate one or more clearly identified economic impediments.

The country is required to consult broadly among civil society, special interest and minority groups (including women), as well as the private sector. They may then develop, at their own expense and typically with their own resources, a proposal. Strong, coherent proposals identify economic impediments through a broad-based consultative process, state a good case for requesting funding for the activities described within, and clearly state the expected impact the designed program will have on both the nation’s economy and the people, particularly the poor.

The MCC’s role is to receive the proposal each eligible country has developed and perform adequate due diligence in order to determine if each proposed program has merit and would be viable if funded by MCC. That means determining: whether the proposal is technically feasible, if the requested funding amount is reasonable and appropriate, if the program was designed in broad consultation with the people and will truly have a transformative impact on the nation, and that the proposal complies with statutory restrictions that prohibit, for example, child labor or severe environmental damage. Lastly, the MCC behaves like a good steward of the United States tax payers’ money, ensuring the money goes to projects that are worthy of investment and will lead to measurable results.

MCA in Practice

With the perspective afforded by having signed five compacts (Madagascar, Nicaragua, Honduras, Cape Verde, Georgia) and approved an additional three (Armenia, Vanuatu, and Benin), it is clear that, although the MCC set out to manage international development programs differently, in practice both the MCC and the first round of MCA eligible countries faced a substantial learning curve in taking the MCA concept from an idea to reality. In May of 2004, three months after MCC’s inception, the Board selected 16 countries for the program, and the clock began to tick for the small staff of roughly 30 people. Faced with such limited resources, MCC decided to give all countries an equal opportunity to submit proposals, but allocate staff for due diligence and program development first to those countries that were ready with good proposals (the first of which was submitted in August of 2004). By as early as December of 2004, it was clear the MCC was not disbursing aid as quickly as some of the eligible countries expected—especially the countries that thought that the mere act of submitting a proposal meant they would receive funding—and pundits began to criticize the MCC for moving too slowly and for disbursing too little aid.

In fact, although the overall ideology that governs the MCC is well supported and propitious, the details left undefined caused difficulty at the beginning. For starters, the small size of the initial staff when the program began strained resources considerably.. Working with the fastest countries first allowed the MCC to maximize the resources of its overtaxed staff and to move quickly with a few countries, but left other countries with little help or attention. This constraint has been ameliorated over time with additional staff and external resources, but did not happen quickly enough to quell criticism of the institution.

Second, the MCC was accused of requiring overly rigorous, time consuming, and expensive analyses and studies that denied countries that had legitimately qualified for MCA funding the hope of ever presenting an acceptable proposal. But it is important to remember that the process was intended to be a challenge from the start. MCC expects countries to deal with the challenge of designing, developing, and implementing their own programs to encourage a sense of ownership and to ensure popular support for the upkeep and continued involvement in the program. Too many projects completed with international funding have crumbled afterwards due to the country’s failure to maintain them, since popular opinion holds that since the donor paid for the project, it is for all practical purposes the donor’s project, and the donor should pay again if the project needs repair or additional funds.

Third, the development community for years has been accused of treating the developing world with condescension, designing programs on its behalf and imposing its own desires or requirements. But the MCC, in addressing this criticism in its program design, faced a separate concern: that host countries, unable or unaccustomed to this new responsibility, would either struggle with the task, provide insufficiently developed or poorly-designed programs, or even lack the capacity to develop a good proposal in the first place. In fact, in more than one country, the consultative process revealed a popular desire for services the host government was ill-equipped to provide due to lack of adequately-prepared engineers, economists, or agricultural specialists.

The issue is a catch-22: some poor countries lack these professionals because there is no work for them to do, as trained professionals emigrate elsewhere to find work in their field of study and remain expatriates. There is little work for locally-trained professionals to do because the immense resources of the development banks and multilateral donor agencies are too easily brought to bear on behalf of these nations, essentially evaporating the local job market for trained personnel. In other cases, war had seriously reduced the stock of trained professionals available to work on the government’s behalf in developing an MCC proposal. Even for countries with greater capacity, the overall process of proposal identification, popular consultation, and compact negotiation was ground breaking and required much learning. Fortunately the MCC is already seeing that countries in the “second round” have greatly benefited from the experiences of the “first round” countries, and they are expected to present stronger proposals as a result.

It is clear that host country capacity for program development is one of the most crucial elements of the process, as strong country teams and well-developed proposals are two of the factors that most determine how quickly the due diligence process will take. Experience now shows that countries where the host government quickly appointed a capable and well-qualified team generally delivered better quality proposals that led to a shorter due diligence process, and governments that moved more slowly to appoint teams, appointed less-qualified staff, or were unwilling or unable to provide adequate resources for program development have required a longer amount of time to complete the due diligence phase of proposal analysis.

Over these two factors the MCC does not have – and should not have – control, given the importance that the MCA gives to the principle of host country ownership. This is the first critical, although difficult, step in a process that could last a decade or more. Given the incentive to produce, retain, and employ local professionals, the local job market for such professionals will grow, and the skill set available to growing nations will expand. It is anticipated that the development of a growing local base of well-educated professionals will be a result of MCC’s having created the incentive for hiring them, and the developing country will gain valuable human capital as a result.

There is ample evidence to support the idea that there is a growing familiarity with the MCA model— a departure from the novelty of the opportunity presented by the Millennium Challenge Corporation two years ago when it first asked eligible countries to work with MCC in a different way than with other donors. Not all countries caught on to MCC’s definition of country ownership, and many early proposals did not reflect a thorough consultative process, or instead of addressing one or two key economic impediments, presented a laundry list of small pet projects with little or no coherence among them. The MCC quickly realized how challenging it had been for eligible countries to design a program for an agency that had no intentions of “filling in the blanks” and fleshing out program details on behalf of the host countries,, and so began to provide more specific guidance, and with added staff resources was able to work more closely with each country to guide it through the process. The second round of countries, declared eligible in November 2005, got a faster start and had the benefit of having watched the first round of countries struggle with their proposals.

Impact of the MCA

Using the metric of aid dollars spent, the MCC was roundly criticized as ineffective during its first two years of operation. But such criticism overlooks the reason MCC was designed to be different than other aid agencies: it has long been clear that more money itself does not lead to more – or faster – development. It is important to take a wider look at what the MCA has achieved in its two short years on earth.

First, MCC has prompted positive change through its willingness to say “No.” In refusing to proceed with Nicaragua’s compact—which included over $100 million in funds for a massive roads rehabilitation program—until a funding mechanism was established to provide for ongoing road maintenance, the MCC helped Nicaragua institutionalize a road maintenance program for the first time in its history, so that not just MCC roads, but all roads, would receive adequate maintenance in the future. In Lesotho, the MCC proposal development process has resulted in an ongoing effort to reform issues of land title and equality under the law. As a country that had up until that point denied women the right to own land, the effect of this major policy change will be felt for generations. And the very restrictive nature of MCA eligibility has promoted policy change in more than one country denied access to MCA funding, including El Salvador, which studied the factors that had caused it to be denied in the first round and addressed them in time to win eligibility in the second round. On one occasion, the leader of an African country met then-CEO Paul Applegarth at a diplomatic function and proudly produced the latest report from Transparency International to show his country had improved on the corruption index.

Success stories like these show the MCA has indeed left its mark on the world even before substantial dollar amounts have been disbursed. The incentive effect created by selecting only countries that have adopted and are adhering to good policies has shown more results so far than the projects themselves. That is just what MCC was set up to do in the short and medium term. The longer-term success of MCC will by seen in the results of MCC-funded projects, as well as an improvement in host country capacity and growing familiarity with a new development paradigm. By requiring that host countries shoulder the burden of designing and implementing a results-oriented development program, MCC creates an important incentive for developing countries to train and retain the sort of thinkers and leaders that will shape these nations’ futures. Keeping this incentive structure in place, even if it means compacts continue to be developed at a pace commensurate with each country’s relative strengths and weaknesses--will eventually build the country’s capacity to take charge of its own development so that it no longer needs aid institutions like the MCC. And that is the goal of development assistance in the first place.


This article first appeared in the 2006 edition of SAIS Perspectives at Johns Hopkins School of Advanced International Studies (SAIS). A PDF version of this article is available from here.

Update 20 April 06: The Center for Global Development's MCA Monitor Blog has provided commentary on my article.

Trackbacks

No Trackbacks

Comments

Display comments as Linear | Threaded

No comments

The author does not allow comments to this entry