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Congress Should Fund the Millennium Challenge Account
by Brett D. Schaefer
Executive Memorandum #963
March 8, 2005
President George W. Bush's 2006 budget proposal includes $3 billion
for the Millennium Challenge Account (MCA), a new foreign assistance
program designed to provide aid to countries that demonstrate a
commitment to economic freedom, ruling justly, and investing in
their people. While this would be the MCA's third appropriation,
the program has existed for only a year and has yet to disburse funds.
Congress should not yield to the temptation to cut the budget request
because the MCA has unexpended funds. Although eligible countries
have taken longer than expected to propose projects for the MCA,
many countries are expected to finalize their proposals soon. These
proposals require funds greatly exceeding the $2.5 billion appropriated
in 2004 and 2005, making the 2006 budget request vitally important if
the MCA is to meet its objectives. The President's request, originally
projected to be $5 billion, already reflects the delayed schedule
and merits support from Congress.
Why the MCA Is Necessary. America's national security and economic
interests are served by helping poor countries to develop. Only by
creating long-lasting opportunities for their people can countries
experience economic growth and reduce terrorist and other security
threats. Moreover, as the U.S. economy and per capita income have
grown, trade has become a greater portion of gross domestic product
(GDP). Helping to encourage economic growth in developing countries
enhances trading opportunities and bolsters the U.S. economy.
For decades, the U.S. has tried to spur economic development through
development assistance--with little success. Between 1980 and 2003,
among countries for which per capita GDP data are available, over $116
billion (in constant 2002 dollars) in U.S. development assistance went
to 89 countries classified as low-income (per capita income below $765)
or lower-middle-income (per capita income between $766 and $3,035). Yet
these recipients often experienced poor--even negative--per capita
economic growth. Of these 89 countries, 37 experienced negative real
annual compound growth in per capita GDP, 20 experienced minimal
growth of 1 percent or less, and 32 experienced growth of over 1
percent. Half of these recipients in sub-Saharan Africa saw a real
decline in GDP per capita.
Clearly, providing development assistance is not sufficient to spur
economic growth in recipient countries. This situation led the Bush
Administration to propose a new development assistance program--the
Millennium Challenge Account--that targets assistance toward
low-income and lower-middle-income countries with a demonstrable
record of investing in people and promoting policies that promote
economic growth and bolster the rule of law.
This new approach is supported by economic studies indicating that
aid is most effective in countries that embrace policies that create
incentives for people to behave more productively, thus encouraging
growth. As noted by President Bush in 2002:
When nations close their markets and opportunity is hoarded by a
privileged few, no amount of development aid is ever enough. When
nations respect their people, open markets, invest in better health
and education, every dollar of aid, every dollar of trade revenue
and domestic capital is used more effectively. The MCA is designed to
show countries how to enhance their prospects for economic growth and
development, with the overarching goal of helping countries graduate
from the need for foreign assistance.
What Has the MCA Done? Some have questioned why the Millennium
Challenge Corporation (MCC), which operates and oversees the MCA,
has not yet disbursed the $2.5 billion appropriated in 2004 and
2005. The answer is that the MCA is a departure from traditional
development assistance. The MCC does not just quickly disburse money
to countries, nor does it dictate to recipients how they must spend
the grants. Instead, a country must first propose a comprehensive
development strategy that is to be funded by MCA grants and demonstrate
how that strategy would improve economic growth and long-term poverty
reduction.
Recipient countries possess an unusual degree of influence over
the proposals and are primarily responsible for implementation. The
MCC requires eligible countries to submit proposals because these
countries know the weaknesses in their economies and their needs far
better than do aid donors. While the MCC will monitor implementation,
progress toward targets, and fiscal accountability measures, the
hands-off approach requires careful analysis in the initial stages
to ensure that the proposals are correctly implemented, are designed
to facilitate economic development, and possess adequate oversight.
Since beginning operations in January 2004, the MCC has been racing
to meet targets. It has hired experts and staff and has selected
countries that meet the criteria established by Congress. On May 6,
2004, the board of directors announced 16 eligible countries for
2004 (Armenia, Benin, Bolivia, Cape Verde, Georgia, Ghana, Honduras,
Lesotho, Madagascar, Mali, Mongolia, Mozambique, Nicaragua, Senegal,
Sri Lanka, and Vanuatu) and dispatched teams to educate these
countries about the MCA and the proposal process. On November 8,
2004, the MCC identified 16 eligible countries for 2005. (Morocco
was added, and Cape Verde was dropped because its per capita income
exceeded the legislated threshold.)
Over the past year, the MCC has received proposals from every eligible
nation except Vanuatu and Morocco, which was selected in November
2004. MCC staff and the countries have spent months negotiating these
compacts in preparation for review by the board of directors and
Congress. Compacts with Georgia, Honduras, Madagascar, and Nicaragua
are farthest along, and those countries should begin receiving grants
in the near future. Other compacts are expected to be completed in
the following months. In total, these compact proposals will require
funds greatly exceeding the $2.5 billion appropriated in 2004 and
2005, making the 2006 budget request vital if the MCA is to meet
its objectives.
Conclusion. The MCA is a new approach to development assistance. By
focusing assistance on countries that are committed to policies
conducive to economic growth and development, the MCA is an opportunity
to demonstrate that assistance can encourage development under the
right circumstances. The MCC has carefully negotiated compacts over
the past year and is poised to disburse grants. Congress should
praise the prudence demonstrated by the new aid program and support
the President's $3 billion budget request.
Brett D. Schaefer is Jay Kingham Fellow in International Regulatory
Affairs in the Center for International Trade and Economics at The
Heritage Foundation.
Congress Should Fund the Millennium Challenge Account
by Brett D. Schaefer
Executive Memorandum #963
March 8, 2005
President George W. Bush's 2006 budget proposal includes $3 billion
for the Millennium Challenge Account (MCA), a new foreign assistance
program designed to provide aid to countries that demonstrate a
commitment to economic freedom, ruling justly, and investing in
their people. While this would be the MCA's third appropriation,
the program has existed for only a year and has yet to disburse funds.
Congress should not yield to the temptation to cut the budget request
because the MCA has unexpended funds. Although eligible countries
have taken longer than expected to propose projects for the MCA,
many countries are expected to finalize their proposals soon. These
proposals require funds greatly exceeding the $2.5 billion appropriated
in 2004 and 2005, making the 2006 budget request vitally important if
the MCA is to meet its objectives. The President's request, originally
projected to be $5 billion, already reflects the delayed schedule
and merits support from Congress.
Why the MCA Is Necessary. America's national security and economic
interests are served by helping poor countries to develop. Only by
creating long-lasting opportunities for their people can countries
experience economic growth and reduce terrorist and other security
threats. Moreover, as the U.S. economy and per capita income have
grown, trade has become a greater portion of gross domestic product
(GDP). Helping to encourage economic growth in developing countries
enhances trading opportunities and bolsters the U.S. economy.
For decades, the U.S. has tried to spur economic development through
development assistance--with little success. Between 1980 and 2003,
among countries for which per capita GDP data are available, over $116
billion (in constant 2002 dollars) in U.S. development assistance went
to 89 countries classified as low-income (per capita income below $765)
or lower-middle-income (per capita income between $766 and $3,035). Yet
these recipients often experienced poor--even negative--per capita
economic growth. Of these 89 countries, 37 experienced negative real
annual compound growth in per capita GDP, 20 experienced minimal
growth of 1 percent or less, and 32 experienced growth of over 1
percent. Half of these recipients in sub-Saharan Africa saw a real
decline in GDP per capita.
Clearly, providing development assistance is not sufficient to spur
economic growth in recipient countries. This situation led the Bush
Administration to propose a new development assistance program--the
Millennium Challenge Account--that targets assistance toward
low-income and lower-middle-income countries with a demonstrable
record of investing in people and promoting policies that promote
economic growth and bolster the rule of law.
This new approach is supported by economic studies indicating that
aid is most effective in countries that embrace policies that create
incentives for people to behave more productively, thus encouraging
growth. As noted by President Bush in 2002:
When nations close their markets and opportunity is hoarded by a
privileged few, no amount of development aid is ever enough. When
nations respect their people, open markets, invest in better health
and education, every dollar of aid, every dollar of trade revenue
and domestic capital is used more effectively. The MCA is designed to
show countries how to enhance their prospects for economic growth and
development, with the overarching goal of helping countries graduate
from the need for foreign assistance.
What Has the MCA Done? Some have questioned why the Millennium
Challenge Corporation (MCC), which operates and oversees the MCA,
has not yet disbursed the $2.5 billion appropriated in 2004 and
2005. The answer is that the MCA is a departure from traditional
development assistance. The MCC does not just quickly disburse money
to countries, nor does it dictate to recipients how they must spend
the grants. Instead, a country must first propose a comprehensive
development strategy that is to be funded by MCA grants and demonstrate
how that strategy would improve economic growth and long-term poverty
reduction.
Recipient countries possess an unusual degree of influence over
the proposals and are primarily responsible for implementation. The
MCC requires eligible countries to submit proposals because these
countries know the weaknesses in their economies and their needs far
better than do aid donors. While the MCC will monitor implementation,
progress toward targets, and fiscal accountability measures, the
hands-off approach requires careful analysis in the initial stages
to ensure that the proposals are correctly implemented, are designed
to facilitate economic development, and possess adequate oversight.
Since beginning operations in January 2004, the MCC has been racing
to meet targets. It has hired experts and staff and has selected
countries that meet the criteria established by Congress. On May 6,
2004, the board of directors announced 16 eligible countries for
2004 (Armenia, Benin, Bolivia, Cape Verde, Georgia, Ghana, Honduras,
Lesotho, Madagascar, Mali, Mongolia, Mozambique, Nicaragua, Senegal,
Sri Lanka, and Vanuatu) and dispatched teams to educate these
countries about the MCA and the proposal process. On November 8,
2004, the MCC identified 16 eligible countries for 2005. (Morocco
was added, and Cape Verde was dropped because its per capita income
exceeded the legislated threshold.)
Over the past year, the MCC has received proposals from every eligible
nation except Vanuatu and Morocco, which was selected in November
2004. MCC staff and the countries have spent months negotiating these
compacts in preparation for review by the board of directors and
Congress. Compacts with Georgia, Honduras, Madagascar, and Nicaragua
are farthest along, and those countries should begin receiving grants
in the near future. Other compacts are expected to be completed in
the following months. In total, these compact proposals will require
funds greatly exceeding the $2.5 billion appropriated in 2004 and
2005, making the 2006 budget request vital if the MCA is to meet
its objectives.
Conclusion. The MCA is a new approach to development assistance. By
focusing assistance on countries that are committed to policies
conducive to economic growth and development, the MCA is an opportunity
to demonstrate that assistance can encourage development under the
right circumstances. The MCC has carefully negotiated compacts over
the past year and is poised to disburse grants. Congress should
praise the prudence demonstrated by the new aid program and support
the President's $3 billion budget request.
Brett D. Schaefer is Jay Kingham Fellow in International Regulatory
Affairs in the Center for International Trade and Economics at The
Heritage Foundation.