The Millennium Challenge Account: Congressional Consideration of a New Foreign Aid Initiative

CRS Report for Congress
The Millennium Challenge Account:
Congressional Consideration of a
New Foreign Aid Initiative
Updated March 19, 2004
Larry Nowels
Specialist in Foreign Affairs
Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

The Millennium Challenge Account: Congressional
Consideration of a New Foreign Aid Initiative
Summary
In a speech on March 14, 2002, at the Inter-American Development Bank,
President Bush outlined a proposal for the United States to increase foreign economic
assistance beginning in FY2004 so that by FY2006 American aid would be $5 billion
higher than three years earlier. The new funds, which would supplement the roughly
$16.3 billion economic aid budget for FY2003, would be placed in a separate fund —
Millennium Challenge Account (MCA) — and be available on a competitive basis to a
few countries that have demonstrated a commitment to sound development policies and
where U.S. support is believed to have the best opportunities for achieving the intended
results. These “best-performers” would be selected based on their records in three areas
— ruling justly, investing in people, and pursuing sound economic policies.
Development of a new foreign aid initiative by the Bush Administration was
influenced by a number of factors, including the widely perceived poor track record of
past aid programs, recent evidence that the existence of certain policies by aid recipients
may be more important for success than the amount of resources invested, the war on
terrorism, and the March 2002 U.N.-sponsored International Conference on Financing
for Development in Monterrey, Mexico.
The MCA initiative is limited to countries with per capita incomes below $2,935,
although in the first two years — FY2004 and FY2005 — only countries below the
$1,415 level would compete for MCA resources. Participants will be selected based on
a transparent evaluation of a country’s performance on 16 economic and political
indicators, divided into three clusters corresponding to the three policy areas of
governance, economic policy, and investment in people. Eligible countries must score
above the median on half of the indicators in each area. One indicator — control of
corruption — is a pass/fail measure: a country must score above the median on this
single measure or be excluded from further consideration.
The Administration proposed to create a new entity — the Millennium Challenge
Corporation (MCC) — to manage the initiative. The MCC would be supervised by a
Board of Directors chaired by the Secretary of State. Several other key issues, including
the number of participating countries and monitoring mechanisms, have yet to be
determined.
Congress plays a key role in the policy initiative by considering authorization and
funding legislation, and confirming the head of the proposed MCC. A number of issues
have been addressed in the congressional debate, including country eligibility criteria,
performance indicators used to select participants, creation of the new MCC, and budget
considerations. Congress approved legislation (Division D of P.L. 108-199) authorizing
the new program and appropriating $994 million for the first year. The measure creates
a Corporation, as proposed, but alters the composition and size of the Board of
Directors. It further limits the extent to which lower-middle income countries in
FY2006 and beyond can participate in the MCA so that more resources will be available
for the poorest nations. The legislation creates a roughly 90-day period after the
Corporation is established for consultation and public comment before selecting MCA
participants for FY2004. It is expected that the Board will name the initial MCA
eligible countries in May 2004.

Contents
Most Recent Developments..........................................1
In troduction ......................................................1
Background of the Millennium Challenge Account Initiative................3
Context ......................................................3
Outlines of the MCA...........................................5
MCA features announced by the Administration.................5
MCA issues undecided within the Administration................6
The MCA and Congressional Consideration.............................7
Country Eligibility and Income Levels.............................7
Issue: Income eligibility.....................................8
Congressional proposals to modify income eligibility..............9
Performance Indicators and Selection Process......................10
Congressional action on performance indicators.................11
Issue: Association of performance indicators with economic
growth and poverty reduction...........................14
Issue: Hurdles and median vs. aggregated ranking...............14
Issue: Surprising country outcomes and modifying the indicators...15
Issue: Data accuracy and availability..........................16
Issue: MCA Board of Directors discretionary authority...........16
Congressional proposals to modify Board of Directors discretion...17
Implications for Other U.S. Assistance Programs....................18
Issue: Commitment to global initiatives.......................18
Issue: Policy coherence and USAID program goals in MCA
countries ............................................19
Organizational Structures.......................................20
Issue: The need for a new organization........................20
Congressional proposals to modify the organization structure......21
Issue: Role of MCC staff in managing and monitoring the MCA....23
Issue: Future of USAID....................................23
Congressional proposals to modify USAID’s role................24
Program Development and Selection..............................25
Issue: Detailing the types and targets of programs...............25
Congressional action on program issues.......................26
Legislative and Funding Matters.................................27
Issue: Flexibility and congressional directives and oversight.......28
Congressional action on flexibility and oversight issues...........29
Issue: Funding and possible tradeoffs.........................29
Congressional proposals to modify MCA funding levels..........30
Appendix A — Comparison of Administration Proposal and Key
Congressional Modifications....................................31
Appendix B — U.S. Aid Compared to Other Major Donors and the
Impact of the MCA...........................................35

List of Figures
Figure 1. ODA Performance 2002...................................35
List of Tables
Table 1. MCA Performance Indicators................................13

The Millennium Challenge Account:
Congressional Consideration of a New
Foreign Aid Initiative
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 Challenge Account and appropriated $994 million for
FY2004. The MCA legislation, included in Division D of 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 who
reports 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, the U.S. Trade Representative, the USAID Administrator,
the MCC CEO, and four others from lists submitted by congressional leaders and
nominated by the President. Low-middle income countries may participate in MCA
programs beginning in FY2006, as proposed, but may not receive more than 25% of
MCA appropriations. The legislation creates a roughly 90-day period during which
the Corporation 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 performing countries, seek public comment on the initiative, and
consult with Congress. Following this review period, countries will be selected
(“eligible countries”) and invited to submit program proposals for funding. This
could take place as early as May 2004.
Introduction
In a speech on March 14, 2002, at the Inter-American Development Bank,
President Bush outlined a proposal for the United States to increase foreign economic
assistance beginning in FY2004 so that by FY2006 American aid would be $5 billion
higher than three years earlier. He further pledged to maintain economic aid amounts
at least at this level into the future. The funds would be placed in a new Millennium
Challenge Account (MCA) and be available on a competitive basis to a few countries
that have demonstrated a commitment to sound development policies and where
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 economic growth.
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 Latin America-focused Alliance for Progress in the
early 1960s. Administration officials characterize the MCA 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. In
particular, Executive officials emphasize the “results-based” aspect of the initiative
in which countries will be selected based on past and current performance, and
programs will be evaluated on and required to show measurable achievements that
impact favorably on economic growth and poverty 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 American development 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 the MCA is that the entire $5
billion money pool — which is nearly twice the size of the FY2003 USAID “core”
development aid budget — will be tied to performance and results. Moreover,
program proposals will be based on national development strategies developed by the
countries themselves, with a U.S. role limited to providing technical assistance in
project design. Further, in another major departure from past policy, the MCA is
intended to focus exclusively on development goals without being influenced by
other U.S. foreign policy and geo-strategic objectives that often strongly influence
U.S. aid decision making. Nevertheless, while new details regarding country
eligibility, selection criteria, and organizational structure were announced in
December 2003, many issues 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 Challenge Corporation that manages the MCA under the President’s
plan. Congress will also maintain continuing oversight of the program as it is
implemented and additional funding is sought in subsequent 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 poorest nations 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 primary
government 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 the budgetary 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 of economic aid provided by the United States and
other international donors, some argue, have been caused to a large extent by a lack
of attention to performance and the requirement for measurable results.¹ Executive
branch officials say that the MCA abandons the process of basing aid allocations on
promises by recipient governments to initiate policy changes in the future, and
instead will make those 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

¹ Others will argue, however, that of equal or perhaps more importance has been the close
ties of U.S. foreign assistance with more strategic and geo-political goals where
development results have been of secondary importance for policymakers charged with aid
allocations and policy formulations.
² See remarks by Andrew Natsios, Administrator, USAID, at the U.S. Embassy in London,
October 21, 2002. [http://www.usaid.gov/press/spe_test/speeches/2002/sp021021.html]

provided and success in raising economic levels and reducing poverty. Rather, some
researchers argued that foreign assistance produced 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 continue to 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 child immunization, by one calculation 97 countries receiving $144
billion (constant dollars) in U.S. aid since 1980 had their median per capita gross
domestic product (GDP) decline from $1,076 to $994 by 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 perspective regarding a possible direct relationship between poverty
and terrorism, especially given the fact that many terrorist leaders come from
relatively wealthy backgrounds. But most agree that poverty can be a contributing
factor. President Bush, in announcing the MCA on March 14, 2002, made numerous
references to the war on terrorism, noting that “We also work for prosperity and
opportunity because they help defeat terror.” He further emphasized that although
poverty does not cause terrorism, “poverty prevents governments from controlling
their borders, policing their territory, 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 a mid-March 2002 U.N.-sponsored International Conference on
Financing for Development in Monterrey, Mexico. Conference proponents hoped
the session would serve as a catalyst for donors to increase aid commitments in order
to achieve by 2015 the ambitious goal of reducing poverty by one-half relative to
1990. At the 2000 Millennium Summit, international leaders, including the United
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, that became known collectively as the Millennium Development
Goals. A World Bank analysis, released February 2002, estimated that to achieve
these goals by 2015, donors would need to increase spending by $40 to $60 billion

³ See, for example, Craig Burnside and David Dollar, “Aid Spurs Growth — in a Sound
Policy Environment,” Finance and Development, December 1997; and Paul Collier and
David Dollar, “Aid Allocation and Poverty Reduction,” The World Bank, January 1999.
⁴ See, for example, William Easterly, “The Failure of Development,” Financial Times, July

3, 2001.

⁵ Testimony of Brent Shaefer, The Heritage Foundation, before the House Foreign
Operations Appropriations Subcommittee, June 27, 2002. Foreign Operations, Export
Financing, and Related Programs Appropriations for 2003. Hearings, Part 3, p. 473.
⁶ President Proposes $5 Billion Plan to Help Developing Nations. Remarks by the President
on Global Development at the Inter-American Development Bank, Washington, D.C., March

14, 2002.

per year, or roughly double the amount provided in 2001.⁷ As the Monterrey
conference approached, international development advocates began pressing
participating governments to issue specific pledges that would help close this funding
gap identified by the World Bank.
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 the U.S. initiative. The NSC
managed overall policy development while the State Department took charge of
outreach — seeking input from the non-governmental community — and the
Treasury Department assembled economic and governance indicators that would be
used to determine eligible countries. The team drafted recommendations on many,
but not all MCA issues, and after being approved 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 levels for FY2004, and consulting with Congress began. On
February 3, 2003, the President proposed $1.3 billion for the MCA in FY2004,
followed two days later by submission of a draft bill authorizing the initiative. 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 framework evolves. These issues are highlighted below and
discussed in more detail in the following section on 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 were
incorporated 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 income below $1,415 are
eligible. The list will expand to 115 over the next two years to
include all countries with per capita GNI less than $2,935. (For
complete list, see appendix B.)
^!Selection criteria and performance indicators. MCA participants
will be selected based on their performance measured by 16

⁷ World Bank, Goals for Development: History, Prospects, and Costs, by Shantayanan
Devarajan, Margaret Miller, and Eric Swanson, April 2002. Text available at
[http://econ.worldbank.org/ vi ew.php?topic=19&type=5&i d=13269].

economic and political indicators. In most cases, a score above the
group median on the indicator would represent a passing “grade”.
The MCA Board of Directors will be guided by the statistical
outcomes, but maintain some discretion over the final 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 Bank Institute.
^!Program development and submission. MCA programs will be
“country-driven” in which participating country officials will design
and submit project proposals based 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 governments and communities,
civil society, and other private entities. National governments,
however, would remain responsible for the program and be the party
to sign a compact between the U.S. and the country. Moreover,
according to Administration officials, all types of assistance —
budget support for government initiatives, infrastructure projects,
and more targeted activities focused on specific sectors — 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 of State.
^!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, reduced the 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 and participate. Administration officials have
suggested, however, that the number will be relatively small —
perhaps less than 20 by the third year. It is also undecided whether
all or only some of the countries that qualify based on the
performance indicators will receive MCA funding. The final list
may comprise selections from the pool of best performing countries
or the selection could be based on the quality of program proposals
submitted by qualifying nations. Other options are also under
review.

^!Impact on USAID program objectives in MCA countries. MCA
participants may or may not continue to receive regular development
aid under existing USAID programs. If they do, it is unclear
whether those activities will change focus in order to support MCA
projects. The role of USAID missions in MCA countries is also yet
to be clearly stated.
^!Monitoring and accountability. Executive officials say that MCA
programs will be closely monitored and scrutinized, perhaps by
some independent auditing system, but they have 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 the road toward
graduation. What criteria to use to end programs in successful
countries or how to withdraw 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 oversight of program implementation, several key
elements of the initiative have been, and will continue to be closely examined. These
will include matters that have already been decided within the executive branch, 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 debate chiefly focused on whether only the poorest nations
should be considered for MCA programs. As noted 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 clusters
according to income level and World Bank borrowing status, with a new cluster
added to the competition each year corresponding to the anticipated rise in MCA
resources. In FY2004, only the 75 IDA-eligible countries with per capita incomes
below $1,415 can compete, while 12 more will be added the next year.⁸ By FY2006,
when $5 billion is planned for MCA programs, countries with per capita incomes
between $1,415 and $2,935 — 28 in number — will be added. Since countries above
$1,415 per capita income are likely to score higher on the eligibility indicators, the

⁸ IDA-eligible borrowers total 81. While most fall below the $1,415 gross national income
(GNI) per capita level, seven small island countries with incomes above this level also can
borrow from IDA. See Appendix B for a complete list of countries falling into each income
grouping.

White House further has decided to have separate competitions for the low and low-
middle income groups to avoid income bias.
Issue: Income eligibility. There emerged at the outset a relatively broad
consensus within the U.S. development community that the MCA should focus on
IDA-eligible, low-income countries.⁹ For a policy aimed at promoting economic
growth and reducing
poverty, most agreed that it made sense to place emphasis where the greatest needs
existed. By expanding the number and income level of MCA participants beyond
IDA-eligible status, some argued, the amount of money available for the poorest
nations would be reduced. Some also noted that the 28 member low-middle income
group includes nations that maintain strong political and strategic ties with the U.S.
— Egypt, Jordan, Colombia, Turkey, and Russia. That would increase the
possibility, or at least the perception, that countries might be selected on criteria other
than MCA performance measures. It may further tend to blur the distinction between
MCA goals and objectives of other aid programs, jeopardizing the unique approach¹⁰
of the MCA and the need for programmatic flexibility. Achieving economic results
as an objective has frequently taken a position secondary to strategic interests 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 a percent 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 private capital flows as a
percent of GDP for the poorer IDA-eligible countries (below $1,415) is 6.9% while
those between $1,415 and $2,935 receive 10.3%. Tax revenues and domestic savings
as a percent of GDP among low-middle income countries are roughly double the
level of those for IDA-eligible borrowers 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 a primary goal of the MCA is to
maximize the effectiveness of aid resources, then non-IDA countries should be

⁹ Three non-governmental organizations, for example, argued that the MCA should limit
participation exclusively to IDA-eligible countries. See InterAction. The Millennium
Challenge Account: A New Vision for Development, May 2002; Catholic Relief Services,
Improving Effectiveness: Recommendations for the Millennium Challenge Account, June
24, 2002; and Bread for the World, Rise to the Challenge: End World Hunger, available at
[http://www.bread.org/issues/rise_to_the_challenge/preview.html ].
¹⁰ See: Lael Brainard, Compassionate Conservatism Confronts Global Poverty, the
Washington Quarterly, Spring 2003, p. 151; and Steve Radelet, Qualifying for the
Millennium Challenge Account, Center for Global Development, December 13, 2002, p. 4.
¹¹ Radelet, Qualifying for the Millennium Challenge Account, Appendix, p. 3.

included.¹² In addition, countries falling in the $1,415 - $2,935 per capita income
range, while maintaining higher income levels, also have large numbers of people
living in poverty. These countries, with stronger institutions and better capacity may
also be better positioned to apply MCA resources 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 standards for qualification, and squeeze out the poorest
nations — seems to be addressed by the Administration. Based on a preliminary
estimate of the median scores of each group, the median would be higher — and in
some cases significantly higher — for 14 of the 16 indicators for low-middle income
countries compared with those below $1,415 GNI per capita.¹³ In FY2006, when the
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 would allow countries to qualify based on comparisons with their
income-level peers. Whether the Administration will divide MCA resources into two
pots of money for each income group has not been determined. In any case, unless
the Administration and Congress agree to increase the MCA beyond the proposed $5
billion target, whatever number of low-middle income nations that qualify will
reduce the amount of resources that would otherwise be available for those below the
$1,415 level.
Congressional proposals to modify income eligibility. Reflecting the
perspective that the MCA should remain focused on the poorest countries, the Senate
Foreign Relations Committee recommended in S. 1160 (as added to S. 950) to permit
participation by low-middle income country in FY2006 and beyond only if MCA
funding exceeds $5 billion. If not, MCA programs could only be supported in
countries that fall below the “historical per capita income cutoff of the International
Development Association,” 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 total amount. The Foreign Relations
Committee further expressed its intention that MCA programs in the 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 for inclusion of the low-income group in
FY2006. The Committee considered two amendments during markup related to the
income issue. The first, offered by Congressman Payne and approved by the House
panel, would have required low-middle income countries that are selected for MCA

¹² Paolo Pasicolan and Sara J. Fitzgerald, The Millennium Challenge Account: Linking Aid
with Economic Freedom. The Heritage Foundation, October17, 2002, p. 2.
¹³ The two indicators for which this would not be the case are trade policy, which would be
the same for each group, and three-year budget deficits. However, because qualification
under the latter indicator is set at a specified threshold — less than 20 percent — group
medians would have no impact on whether a country passed this hurdle. Source: CRS
analysis based on data compiled by Steve Radelet, Center for Global Development.

grants to make a contribution from their own resources to whatever MCA programs
are funded. The second 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 Latin
America eligible from the beginning. Similarly, Congressman Kolbe proposed an
amendment during House floor debate that would have allowed low-middle income
countries to be eligible beginning in FY2005 rather than FY2006. The Kolbe
amendment failed 110-313. While sympathetic to the concerns expressed by
sponsors of the amendment, those opposed to changing the income eligibility
structure argued that resources diverted from Latin America and many other nations
would come at the 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 and FY2005. 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 that year.
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 to understand. Another key factor is whether the data source
provides full coverage for as many countries as possible and is relatively current.
Officials further sought to identify indicators that would be few in number but
sufficient to reflect broad policy results in each of the three policy categories, and
valid relationships between the indicators and economic growth and poverty
reduction. Finding indicators that meet all of these requirements is difficult, and
according to some, impossible. Gathering valid economic, social, and political
statistics, especially in developing nations, 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 achievements unfettered of
institutional bias by whatever organization or individuals collect and interpret the
data is 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 and encouraging economic freedom categories, while four
will determine results in the area of investing in people. Sources include
international institutions, such as the World Bank, IMF, and U.N., and non-
governmental and private organizations like Freedom House, Heritage Foundation,
and the Institutional Investor Magazine. National statistics will also be drawn upon
where gaps occur, but none 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 be above the median of all 75
countries in the first year on three of the six indicators for ruling justly and economic
freedom, and two of the four for investing in people. The one exception to the
median standard is the inflation indicator — a country’s inflation must be below 20
percent in order to pass that hurdle. Officials believe that the hurdle methodology
will demonstrate that a country is committed in all three areas and more precisely
identify policy weaknesses. In year three and beyond, when low-middle income
countries are added to the competition, there will be separate evaluations for
countries below and above $1,415 per capita incomes so that higher income countries
will 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 of performance on any of the other 15 indicators. Executive
officials argue that since there are strong links between financial accountability and
economic success, a strong commitment to fight corruption 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 be granted a degree of discretion in selecting the
final participants, taking into account such things as missing or old data, trends in
performance, and other information that might reflect on a country’s commitment to
economic growth and poverty reduction. Moreover, officials have yet to decide
whether to fund programs in all countries that qualify and pass the final review.
Final selection, for example, 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 also maintain 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 incorporated into 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 the Internet and that
the Administration consider public comment prior to issuing the final determination
of the indicators. In this way, the Committee believed that the indicators could be
refined and improved.
H.R. 1950 required the Corporation’s CEO to consult with congressional
committees prior to establishing eligibility criteria and methodology and publish such
criteria once finalized. Both bills further directed that country eligibility would be
based on an evaluation of performance 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 selection be 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 MCA Act 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 and education for women and girls. While
none of the 16 indicators chosen by the Administration directly address these three
additional concerns, it is likely that MCC officials will review existing indicators or
search for new performance measure in order to better evaluate progress on these
three factors added by Congress. The legislation further requires the Corporation to
publish the eligibility criteria and methodology used for country evaluation on its
website and in the Federal Register, and receive public comment and congressional
input prior to country selection decisions.

CRS-13
Table 1. MCA Performance Indicators
Ruling JustlyInvesting in PeopleEconomic Freedom
^nt^ro^{l o}^f^Co^rrupt^ioⁿ^P^{ublic P}^r^im^a^r^y^Educa^t^io^{n Spending}^a^s^{% o}^f^G^D^P^{Country Credit Rating}
^u^r^{ce: W}^o^r^l^d^B^aⁿ^k^Iⁿ^stitu^te^So^ur^c^e^s^:^N^a^tⁱ^o^na^l^go^ve^rⁿ^m^e^nt^s^So^u^r^{ce: I}ⁿ^stitu^tioⁿ^a^{l I}ⁿ^v^e^sto^r^Mag^azin^e^{, Sep}^t^em^b^e^r
^p^:^/^/^www.^wo^r^l^d^b^aⁿ^k^.^o^r^g^/^wbⁱ^/^g^o^v^e^rⁿ^aⁿ^c^e^/^p^u^b^s^/^g^2003.
^m^a^t^t^e^rs^3.h^t^m^l
^{ice a}^{nd Acco}^unt^a^b^ilit^y^Pri^m^{ary E}^d^u^c^ati^oⁿ^C^o^m^p^l^e^ti^on^R^a^te^Inf^l^a^t^ioⁿ^(m^u^s^t^{be bel}^o^w^20%⁾
^u^r^{ce: W}^o^r^l^d^B^aⁿ^k^Iⁿ^stitu^te^So^ur^c^e^s^:^W^o^r^l^d^B^a^{nk a}ⁿ^d^U^N^E^SCO^So^u^r^{ce: Mu}^ltip^le
^p^:^/^/^www.^wo^r^l^d^b^aⁿ^k^.^o^r^g^/^wbⁱ^/^g^o^v^e^rⁿ^aⁿ^c^e^/^p^u^b^s^/^g
^m^a^t^t^e^rs^3.h^t^m^l
^e^{nt E}^f^fectivenes^s^Pu^b^lⁱ^c^E^x^p^eⁿ^dⁱ^tu^{re on}^Heal^th^as^%^{of G}^D^P^T^h^{ree-year B}^{udget Deficit}
ⁱ^{ki/CRS-RL31687}^u^r^{ce: W}^o^r^l^d^B^aⁿ^k^Iⁿ^stitu^te^So^ur^c^e^s^:^N^a^tⁱ^o^na^l^go^ve^rⁿ^m^e^nt^s^So^ur^c^e^:^N^a^tⁱ^o^na^l^go^ve^rⁿ^m^e^nt^s
^g/w^p^:^/^/^www.^wo^r^l^d^b^aⁿ^k^.^o^r^g^/^wbⁱ^/^g^o^v^e^rⁿ^aⁿ^c^e^/^p^u^b^s^/^g
^s^.or^m^a^t^t^e^rs^3.h^t^m^l
^le^ak^f^L^a^w^Im^m^uniza^tⁱ^oⁿ^Ra^t^e^s:^DP^{T a}^{nd M}^e^a^s^les^Tra^d^{e Po}^licy
^://wiki^u^r^{ce: W}^o^r^l^d^B^aⁿ^k^Iⁿ^stitu^te^p^:^/^/^www.^wo^r^l^d^b^aⁿ^k^.^o^r^g^/^wbⁱ^/^g^o^v^e^rⁿ^aⁿ^c^e^/^p^u^b^s^/^g^So^u^r^{ces: W}^o^r^l^d^Health^Or^g^aⁿⁱ^zatioⁿ^So^ur^c^e^:^T^h^e^H^e^rⁱ^t^a^ge^Fo^und^a^tⁱ^o^n,^Iⁿ^d^e^{x o}^f^Econ^omⁱ^c^F^r^eedom
^h^ttp^m^a^t^t^e^rs^3.h^t^m^l^h^t^t^p^:^/^/^www.^h^e^rⁱ^t^a^g^e^.^o^r^g^/^r^e^s^e^a^r^c^h^/^f^e^a^t^u^r^e^s^/ⁱⁿ^d^e^x^/
^{il Libert}^ies^Reg^u^la^t^o^ry^Po^licy
^r^{ce: Freedom}^Hou^s^e^So^u^r^{ce: W}^o^r^l^d^B^aⁿ^k^Iⁿ^stitu^te
^p^:^/^/^www.^f^r^e^e^d^o^m^h^o^u^s^e^.^o^r^g^/^r^e^s^e^a^r^c^h^/^f^r^e^e^w^o^r^l^d^/²^h^t^t^p^:^/^/^www.^wo^r^l^d^b^aⁿ^k^.^o^r^g^/^wbⁱ^/^g^o^v^e^rⁿ^aⁿ^c^e^/^p^u^b^s^/^g
^t^a^bl^e2004.pdf^ov^m^a^t^t^e^rs^2003.h^t^m
^D^ays^{to S}^t^{art a Bu}^sⁱⁿ^e^s^s
^r^{ce: Freedom}^Hou^s^e^So^ur^c^e^:^W^o^r^l^d^B^a^nk
^p^:^/^/^www.^f^r^e^e^d^o^m^h^o^u^s^e^.^o^r^g^/^r^e^s^e^a^r^c^h^/^f^r^e^e^w^o^r^l^d^/²^h^ttp^://r^r^u^.w^o^r^ld^b^aⁿ^k^.^o^r^g^/^Doⁱⁿ^g^B^u^sⁱⁿ^ess/Sn^ap^sh^o^t^R
^t^a^bl^e2004.pdf^ep^o^r^ts/En^t^r^y^Reg^u^l^atioⁿ^s^.asp^x

Issue: Association of performance indicators with economic
growth and poverty reduction. Analysts will be examining the set of 16
indicators to determine how well they predict successful development outcomes. An
initial assessment by the Center for Global Development suggests that many of the
indicators show a reasonable or strong relationship with economic growth, infant
mortality, and literacy rates, although a few show weak associations, especially in the
economic freedom category. According to the Center’s analysis, each of the six
governance indicators maintains good or strong correlation to development
outcomes. The measure of public primary education spending as a percent 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 weakly correlated with¹⁴
development achievements.
Issue: Hurdles and median vs. aggregated ranking. Some argue that
an aggregation of scores and top-to-bottom ranking rather than the use of hurdles is
a better way in which to determine eligibility with an above-the-median score
requirement. While the Administration holds that passing half the hurdles in each
of the three policy areas ensures broad commitment to both economic growth and
poverty reduction, it also means that countries do not have to meet each of the 16
standards to qualify. This approach departs from more traditional aid requirements
in which recipients must comply with all conditions associated with a program
framework, especially those of the World Bank, IMF, and in some cases U.S. aid
agreements. Once a country passes a hurdle, there are limited incentives to keep
improving in those areas. For countries that miss qualifying by a small margin,
however, the incentive remains.
Use of the median also in some cases complicates efforts for a country to pass
the 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
Possible First-Year Qualifiers — Onecase in FY2005. In other instances,
Analysisa country may improve on a
particular indicator but still not pass
ArmeniaHondurasSenegalthe hurdle because other countries
BhutanLesothoSri Lankaimprove more significantly and
BoliviaMongoliaVietnampush the median higher.
GhanaNicaraguaConversely, a government could
regress or remain stagnant over time
^Source:^Stev^{e R}^a^{delet, “}^W^hⁱ^ch^C^o^uⁿ^t^ries^A^r^{e Mos}^tbut pass a hurdle it had failed the
^Lⁱ^k^e^ly^to^Qu^alif^y^f^o^r^th^{e MCA}^?^An^Up^d^a^te.”previous year because the median
^C^eⁿ^t^{er f}^o^{r G}^l^obal^D^e^v^e^l^opm^en^t^.^May³⁰^{, 2003.}
^Av^aⁱ^l^a^b^l^e^a^t^:^[^h^t^t^p^:^/^/^www.^c^g^d^e^v^.^o^r^g^/^p^u^b^sdrops. A number of observers have
^/^c^h^a^l^l^eⁿ^gⁱⁿ^g^_^aⁱ^d^/^c^ouⁿ^t^ry^%^20qu^alⁱ^fⁱ^catⁱ^oⁿ^%^20u^pdsuggested that instead of using the
^ate1.pdf^]median, it would be better either to

¹⁴ Radelet, Qualifying for the Millennium Challenge Account. See especially Table 2,
Appendix, p. 2. This study also provides a useful critique of each of the 16 indicators
concerning data availability, reliability, and other relevant issues. Text available at
[ h t t p : / / www.cgdev.or g/ nv/ Choosi n g_ MCA_Count r i es.pdf ] .

set specific, individual thresholds that would be relevant to each indicator or to use
absolute 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 scoring
country performance, resulting in many falling at the median. The Freedom House
assigns scores on a 1-7 scale, while the Heritage Foundation uses a scale of 1-5. For
the trade policy indicator, for example, 15 of the 75 IDA-eligible countries are
assigned the median score of 4. Since a country must place above the median to pass
a hurdle, this eliminates a number of candidates with limited differentiation of
performance.
Issue: Surprising country outcomes and modifying the indicators.
Many have been surprised by the possibility that countries such as Vietnam and
China might qualify, despite scoring near the bottom on half of the indicators for
ruling justly. Both countries pass the hurdles for corruption, rule of law, and
government effectiveness, but have some of the worst scores in the categories of
political rights, civil liberties, and voice and accountability. Since they score above
the median for three of the six indicators and pass 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. When
half the indicators in a single category are strongly related to one another, and a
country 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 and
trade, but would have passed the economic freedom grouping with data available in
early 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 than
one-half the total cluster. In this way, a country would not pass one of the three
categories based on a strong showing in one respect but very poor standards for the
other measures. Another alteration to the Administration’s plan would be to add an
additional indicator in each category so that there would be an odd number of
measurements 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, evenly
divided, highly correlated groupings. One review of the MCA proposal argues that
the initiative does not include sufficient attention to democracy issues because it
includes indicators in the ruling justly category that are better measures of economic,
not political freedoms. This analysis recommends a shift of the corruption, rule of

¹⁵ See, for example, Nancy Birdsall, Ruth Levine, Sarah Lucas, and Sonal Shah, On
Eligibility Criteria for the Millennium Challenge Account, Center for Global Development,
September 12, 2002, p. 5; and Radelet, Qualifying for the Millennium Challenge Account,
p. 25. As noted above, the Administration’s proposal sets a specific threshold for the
inflation indicator.
¹⁶ Brainard, Compassionate Conservatism Confronts Global Poverty, p. 158. According to
more recent data, Egypt would not qualify in FY2006.

law, 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 in each of the 16 measurements. This cannot be overcome but is mitigated
to some extent 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 an assessment made by the authors of the corruption index, there is a
large margin of error and high degree of uncertainty for 25 countries that score
slightly above or slightly below the median. Either cross-country data are not
informative or sources disagree on a country’s corruption standing. Of the total of
25, 13 fall below the median and would therefore be eliminated from further
consideration, despite strong doubt as to whether the data measured performance
accurately. To overcome this potential weakness, the authors recommend that MCA
managers employ in-depth country diagnostics regarding governance performance¹⁸
for countries that fall near the medium — the “yellow light countries.”
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 the
115 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. For
other indicators where data were incomplete or lagged, especially in the cases of
education and health spending as a percent of GDP, executive officials say they will
rely 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 the purely statistical record will help address
some of the data accuracy and availability problems. But there appears to be divided
opinion over how much discretion should be permitted.
Arguing for broader flexibility, some note that countries that just miss
qualifying, possibly because of the lack of data, could still be reconsidered and
approved.¹⁹ In the case of “close-calls,” the Board could examine trends over time
to assess if a borderline country was improving or falling back in performance, and
make appropriate adjustments. In order to maintain the integrity and transparency of
the selection process, final judgments that deviate from the methodological base will
need to be clearly explained and closely examined.²⁰ This will be especially

¹⁷ Thomas Palley, The Millennium Challenge Accounts: Elevating the Significance of
Democracy as a Qualifying Criterion. Open Society Institute, January 2003.
¹⁸ Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi, Governance Matters III:
Governance Indicators for 1996-2002, discussion draft, June 30, 2003. Available at
[ h t t p : / / www.wor l dbank.or g/ wbi / gover nance/ pdf / govma t t e r s 3.pdf ] .
¹⁹ Daniel Kaufmann and Aart Kraay, Governance Indicators, Aid Allocations, and the
Millennium Challenge Account, discussion draft of December 6, 2002.
²⁰ One observer acknowledges that some discretionary authority is needed, but adds when
(continued...)

important in cases where the country with close strategic and political ties to the
United States is included despite not meeting all the hurdle tests. The same will be
true should the President decide to reject a country that has recently opposed or
refused to support an important U.S. security-related policy. Others disagree,
however, contending that any discretion on the part of the Board would invite
unwarranted political influence and undermine MCA effectiveness.²¹ Another
analyst argues that one way to avoid undue foreign policy intrusion would be to
channel 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 Relations Committee initially reported an MCA
authorization bill that did not authorize the creation of a Millennium Challenge
Corporation, with a Board overseeing its operations. Instead, S. 1160 placed the
MCA within the State Department under the authority of the Secretary of State and
gave the Secretary the power to determine eligible countries through the evaluation
of a government’s commitment 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 was
largely based on a proposal offered by Senator Lugar (S. 1240). The modified
arrangement, which was incorporated as Division C of S. 925, established a
Corporation to be managed by a CEO. Under the Senate measure, the CEO would
report to and be under the direct authority and foreign policy guidance of the
Secretary of State. S. 925, as amended, further established a Board of Directors,
chaired by the Secretary of State, and grants the Board the power to determine
eligible countries by evaluating the commitment of a country to democratic
governance, economic freedom, and investments in people. This did not, however,
appear to limit the Board’s selections based solely on the results of the performance
indicators. In this way, the Senate measure seemed to permit a similar degree 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 to bolstering
democracy, investing in health and education, and promoting sound economic
policies, but did not specifically identify how such a commitment would be
determined, other than through the creation of eligibility criteria and a methodology.

²⁰ (...continued)
the Board issues a waiver and deviates from the performance indicator outcome, it should
be required to publically issue a policy justification and rationale for making the exception.
See, Palley, The Millennium Challenge Accounts: Elevating the Significance of Democracy
as a Qualifying Criterion, p. 14.
²¹ Brent D. Schaefer and Paolo Pasicolan, How to Improve the Bush Administration’s
Millennium Challenge Account. Heritage Foundation Backgrounder no. 1629, February 28,

2003.

²² Nicolas van de Walle, A Comment on the MCA Proposals, Center for Global
Development, January 9, 2003. Available at [http://www.cgdev.org/nv/features_MCA.html]

As enacted, the MCA authorizing legislation follows the general themes of
earlier House and Senate bills. “Eligible” countries are to be determined, to the
maximum extent possible, by objective and quantifiable indicators measuring a
country’s commitment to the three core policy goals of ruling justly, promoting
economic freedom, and investing in people. The legislation directs that the selection
is to be based on the consideration of three factors: the extent to which the country
meets or exceeds the eligibility criteria; the opportunity to reduce poverty and
promote economic growth in the country; and how much money is available to carry
out MCA programs. This appears to provide substantial flexibility and discretionary
authority 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 exercise
discretion in deviating from a strictly statistical evaluation. S. 925, as amended on
July 9, gave the Board of Directors authority to determine whether a country is
eligible, while H.R. 1950 placed the power with the Corporation’s CEO. The
enacted legislation gives this authority to the Board of Directors.
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 to
serve multiple national interests and foreign policy goals, including security,
humanitarian, multilateral, and commercial objectives. Administration officials have
made a commitment that the MCA will be in addition to existing aid activities and
that regular U.S. programs will continue even in MCA-participating countries.
Nevertheless, because of the priority being placed on the MCA policy orientation and
the size of the financial investment, there almost certainly will be ramifications of the
new initiative for current programs. Foremost may be funding tradeoffs, especially
given rising budget deficits and the costs of fighting the war on terrorism. (Spending
issues 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 a portion of the MCA should be dedicated to effective and
results-oriented global programs operated on a multilateral basis. One concern is that
the large amount of resources directed to the MCA may limit the U.S. ability to
maintain or expand upon commitments to such activities as the Global Fund to Fight
HIV/AIDS, Tuberculosis, and Malaria. Another worry is that soundly managed, high
impact programs in countries with weak governance and poor corruption standards
will miss out on the MCA opportunity to accelerate a process that is already making
a contribution to long-term economic growth and poverty reduction. Proponents of
this view advocate a “two-tiered” approach to the MCA in which separate pools —²³

and perhaps multiple pools — are maintained to serve several types of activities.
²³ See, for example, Gene Sperling and Tom Hart, A Better Way to Fight global Poverty
Broaending the Millennium Challenge Account, Foreign Affairs, March/April 2003, p. 9.

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 not
necessarily have the same results-oriented performance requirements of the MCA,
a fact that would undermine the main objective of the MCA. Increased resources are
only one important feature of the new initiative, and to many MCA advocates, the
most significant feature by far is the goal of allocating the aid where it will have the
greatest impact and be most readily accounted for.
Issue: Policy coherence and USAID program goals in MCA
countries. The Administration says it will maintain regular development aid
programs in a country while it simultaneously launches a far larger MCA-designed
activity. Executive officials have not said, however, how this might affect the shape
and goals of continuing programs managed by USAID missions. Some may argue
that regular aid objectives should be re-oriented to maintain policy consistency with
the MCA initiative and in some cases to help facilitate the core focus of the larger
pool of resources. Others, especially within USAID country missions, may question
whether successful projects should be abandoned, with a potential negative impact
on the target population. In perhaps the clearest statement to date, USAID
Administrator Natsios told the House Foreign Operations Appropriations
Subcommittee that actions may vary from country to country. He noted that USAID
missions in MCA-selected countries would likely undertake a strategic review of
their programs and may adjust projects to support the MCA contract. In other cases,
however, missions might continue high-priority activities, such as those combating²⁴
HIV/AIDS or curbing trafficking in persons, or terminate certain activities.
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 at
promoting economic growth in developing nations. One study, for example,
concludes that there is very little overlap between countries likely to qualify for the
MCA and those currently eligible for debt reduction under the Heavily Indebted Poor
Country (HIPC) initiative or for trade preferences under the African Growth and²⁵
Opportunity Act. Congressman Jim Kolbe, Chairman of the House Foreign
Operations Subcommittee, the House panel with jurisdiction over funding the MCA,
suggests that MCA qualifiers should get special consideration for expedited trade
preferences that would further accelerate economic growth possibilities.²⁶ Still others
who support the MCA framework find fault with the Administration for not devising
simultaneously an overall foreign aid strategy into which the MCA fills one of²⁷
several elements of a comprehensive policy.

²⁴ Statement by Andrew Natsios, Administrator USAID, before the House Foreign
Operations Appropriations Subcommittee, May 21, 2003.
²⁵ Brainard, Compassionate Conservatism Confronts Global Poverty, p. 160.
²⁶ Jim Kolbe, Lessons and New Directions for Foreign Assistance, The Washington
Quarterly, Spring 2003, p. 197.
²⁷ Steve Radelet, Will the Millennium Challenge Account be Different? The Washington
Quarterly, Spring 2003, p. 184.

Beyond U.S. programs and policies, other foreign aid donors and institutions are
expressing concerns that the MCA may be creating additional, and perhaps
competing performance goals to those that already exist. How MCA program goals
align 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 program
management will be placed. This debate has raised issues discussed for many years
concerning under what auspices U.S. foreign aid policy should be designed,
coordinated, and managed. Over the years, suggestions have ranged from
coordination within the National Security Council, creation of umbrella
organizations, like the ill-fated International Development Cooperation Agency, and
most recently the merger of such responsibilities into the State Department. After
extensive debate during the mid-1990s, a decision was reached to make USAID, the
principal U.S. government bilateral aid agency, totally independent, but to have it
operate 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 new
government entity — the Millennium Challenge Corporation — to manage the
initiative. Given the innovative and non-traditional approach inherent in the MCA
concept, executive officials said it makes sense to establish a new entity to oversee
its implementation. The Corporation, as proposed, would have a CEO, confirmed
by the Senate, and a staff of no more than 100 that would be drawn largely from other
government agencies and serve for limited-term appointments. A Board of Directors,
chaired by the Secretary of State and include the Treasury Secretary and OMB
Director, would oversee the MCC. Although it appears there is no precise existing
model in the U.S. government, officials said that the MCC would most closely
resemble the Overseas Private Investment Corporation, an organization that promotes
private American investment overseas, and the Commodity Credit Corporation, an
arm of the Department of Agriculture that manages export credit guarantee programs
for the commercial sale of American agricultural goods. An important difference
between these and the MCC, however, is the proposal to have a cabinet-member
Board oversee the latter and make final recommendations.
Issue: The need for a new organization. Before agreeing on the MCC,
the inter-agency steering committee reportedly looked seriously at the option of
creating a separate unit within the State Department to manage the MCA. One
reason for rejecting this proposal may have been the relative lack of experience of
State Department staff in administering aid programs. This was one of the central
issues considered when the question of whether to fold USAID into the Department
was under debate. This technical shortcoming, however, could have been overcome
by adopting the MCC principle of detailing aid experts from other agencies to staff
the office. A broader reason for not placing the MCA within the State Department,
however, may have been a concern that it would be located too close to the center of
the U.S. foreign policy apparatus that would limit the program’s immunity from
strategic and political influences. At a minimum, many observers believed, there
would be a perception problem — whether true or not — that the MCA did not truly

represent a departure from 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 development
experience, maintained the knowledge, staff, and on-the-ground country presence to
most effectively administer and monitor the MCA. To place responsibility
elsewhere, they contend, would risk duplication of effort, competing priorities, and
inconsistent policies.²⁸ Another, business-related organization also opposes the
creation of a new institution. Rather it recommends the establishment of a “small
core office” (unspecified as to where it would be placed) that would identify program
priorities and distribute the MCA funds to USAID and the Trade and Development
Agency (TDA).²⁹
Others are skeptical, however, that USAID is best suited to implement the MCA
concept. The Agency is frequently criticized as encumbered with excessive
regulations, managed with poor financial systems and time-consuming planning
cycles, and burdened by extensive congressional oversight. One analysis, after
weighing 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 on the 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, the legislation designated the Secretary
of State as the coordinator of MCA assistance and directed the Secretary to designate
a coordinator within the State Department for managing the program. The
coordinator, who would be confirmed by the Senate, would have authority to develop
the list of performance indicators, select eligible countries, 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 1998
Congress had consolidated two independent agencies — USIA and ACDA — in the
State Department in order to give the Secretary more director authority over all tools
of U.S. foreign policy. To create a separate entity to manage what could become the
cornerstone of American foreign assistance, they argued, would run counter to these
recent efforts to better integrate and coordinate foreign policy decision-making.

²⁸ See, for example, the arguments of InterAction, raised in its May 2002 policy paper, The
Millennium Challenge Account: A New Vision for Development.
²⁹ Business Recommendations for Administering the Millennium Challenge Account.
Business Council for International Understanding. Available at
[http://www.bciu.org/ MCA.pdf].
³⁰ See Carol Lancaster, Where to Put the Millennium Challenge Account?, Center for
Global Development, October 15, 2002.

Supporters further questioned what value the OMB Director would provide by being
on the Board of Directors, given that the Director is generally not assigned policy-
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 Lugar
read a letter from Secretary Powell underscoring the value of a new, independent, and
creative entity for managing this “new start” to U.S. foreign aid. The Secretary said
that if this approach remains in the final bill, he would recommend that the President
veto the legislation.
Senator Lugar, who opposed the Biden-Hagel amendment, proposed an
alternative structure in new legislation. S. 1240, as introduced on June 11, would
create a Millennium Challenge Corporation, headed by a CEO who would report to
the Secretary of State. Senator Lugar intended that such an arrangement would
provide the Corporation with the same degree of independence and status as USAID,
but establish a chain of command that would permit the Secretary of State to exercise
broad authority over the MCA. S. 1240 created a Board of Directors, made up of the
Secretary of State (Chairman), the Secretary of the Treasury, the USAID
Administrator, the U.S. Trade Representative, and the MCC CEO. The full Senate
adopted the general approach proposed by Senator Lugar when it voted on July 9,
2003, to incorporate a modified text of MCA authorizing legislation into S. 925, an
omnibus foreign policy authorization bill. The approved text further strengthened the
explicit relationship between the Corporation and the Secretary of State by adding
that the CEO shall “report to and be under the direct authority and foreign policy
guidance of the Secretary.” The Administration 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 a new Millennium
Challenge Corporation sought by the President, but altered the composition of the
Board of Directors and, as noted above, the authority of the MCC’s Chief Executive
Officer. The Board would include the Secretary of State as Chairman and the
Secretary of the Treasury, as proposed, but deleted the Director of OMB and added
the USAID Administrator, the U.S. Trade Representative, and the CEO of the MCC.
The bill also included four additional members, to be appointed by the President from
a list submitted by the majority and minority leaders of the House and Senate. The
Board would further include as non-voting ex-officio members, the CEO of OPIC,
and the Directors of the Trade and Development Agency, Peace Corps, and OMB.
The House measure further created an Advisory Council that would advise, consult,
and make recommendations to the CEO and Board of Directors for improving the
MCA. The Council would include seven CEO-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 combined
approaches found in both House and Senate bills. The statute creates an independent
Millennium Challenge Corporation, headed by a CEO who is confirmed by the

Senate and reports to the Board of Directors. The Board consists of the Secretary of
State (Chairman), the Secretary of the Treasury, the USAID Administrator, the U.S.
Trade Representative, and the CEO. Four additional individuals will be on the Board
that “should” be named by the President from lists of candidates supplied by the
Majority 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 is the ability of a 100-staff organization to
maintain proper oversight and accountability standards over what will become a $5
billion program. By comparison, USAID maintains a staff of nearly 2,000 American
direct-hires and several thousand more contractors and foreign nationals based
overseas to implement a roughly $8 billion program. Few would argue that a similar
work-force is needed — indeed, there would likely be minimal support for a
bureaucracy even half that size. But with a central mandate of performance, results,
and accountability, the MCA requires a strong monitoring capability. The
Administration has mentioned the prospect of an outside, 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 in
various capacities. USAID Administrator Andrew Natsios has told his staff that the
Agency’s long record of best practices and experience will be required if the MCC
is to be successful. But how this will operate in the field is an open question. There
is concern among some USAID professionals that the time and attention of mission
staff to support administrative, contracting, and procurement needs of MCA
programs will diminish their ability to manage regular aid programs. And as
mentioned above, how the current mission portfolio relates to MCA objectives is
unclear.
Issue: Future of USAID. The creation of a new agency to manage the MCA
is likely to be viewed by some as a vote of no confidence in USAID. This may
stimulate renewed debate over whether the USAID mandate should be modified —
perhaps limiting it to a strictly humanitarian aid agency — or folding it into the State
Department or the MCC itself at some future date. USAID supporters are concerned
that an MCA managed outside the principal U.S. development organization will
establish a two-class aid system with USAID responsible for addressing the needs of
the “weaker” performers while the main emphasis will transfer to the MCC. The
potential impact on staff recruitment and morale, and eventually resources, they
believe, could be serious. An argument could be made as well, however, that this
provides an opportunity for USAID not only to demonstrate its expertise as an aid
organization and serve the MCC as a valued “consultant,” but also can serve as
incentive to review its own operations and correct some of the persistent problems
identified by critics.³¹

³¹ One analyst also notes a certain irony to locating the MCA outside of USAID and leaving
the agency with just three core missions: humanitarian, immediate post-conflict, and basic
health and education programs in poor performing nations. This would place USAID
(continued...)

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 in efforts to minimize overlap and
inconsistency of aid policies and operations. As mentioned above, under both bills
the USAID Administrator would become a voting member of the Board of Directors.
S. 925, as amended, further directed Corporation staff posted overseas to coordinate
the MCA program with the USAID mission director in that country. The legislation
also directed USAID to ensure that agency programs would help prepare potential
MCA participant countries to become eligible 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 to development 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 MCA could be made available
for such USAID programs. (The Senate measure also provided up to 10% of annual
MCA funds be available to countries that failed to qualify 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 officials regarding the contents of a contract — or Compact — between the
U.S. and an MCA participant country, and required that the MCC and USAID
coordinate their programs to the maximum extent possible. During House floor
debate, Members adopted an amendment by Congressman Kolbe intended to further
clarify USAID’s role in providing U.S. economic assistance. The language stated
that the USAID Administrator shall report to the President “through, and operate³²
under the foreign policy authority and direction of the Secretary of State.” The
Kolbe amendment also authorized USAID to extend assistance to countries ineligible
for MCA aid so that 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 615
of the measure requires the CEO to consult with the USAID Administrator, and that
USAID must ensure that its programs play a primary role in preparing countries to
become eligible for the MCA. As such, the legislation makes available up to 10%
of the MCA appropriation ($99 million in FY2004) for assisting countries that
demonstrate a “significant commitment” to the MCA requirements, but narrowly
miss qualifying. USAID may provide this support. The statute further requires
USAID to seek to ensure that agency programs play a primary role in helping prepare

³¹ (...continued)
programs much closer to broad U.S. foreign and strategic policy interests than the MCA.
Yet, the State Department, by virtue of the Secretary being the MCC Board Chairman,
would have greater influence over the MCA than the independent USAID. See Brainard,
Compassionate Conservatism Confronts Global Poverty, p. 165.
³² This is similar to current law (Sec. 1522 of P.L. 105-277) which states that the USAID
Administrator shall “report to and be under the direct authority and foreign policy guidance
of the Secretary of State.”

a country that has failed to qualify previously to better compete in the next selection
process.
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 nation
is identified as eligible, it will be invited to draft and submit program proposals for
evaluation and selection through the MCC. Projects should directly support broad
national development strategies already in place, preferably constructed with
extensive input from civil society. Since several of the possible MCA countries have
already designed such strategies as part of the Heavily Indebted Poor Country (HIPC)
debt reduction initiative — the Poverty Reduction Strategy Papers — these PRSPs
might 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 national
initiatives; infrastructure development, commodity financing, training and technical
assistance, and capitalization of enterprise funds or foundations. Selection would
depend on country-specific circumstances and would not be appropriate in all cases.
For example, budget support programs would only be suitable where governments
maintain transparent budgeting, accounting, and control systems and have strong
governance and anti-corruption records. Endowing enterprise funds or foundations
might be appropriate where other alternatives are weak or where innovative ways of
financing 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 contractual
relationship with selected countries and require the establishment of project
performance goals so that progress could be closely monitored. Should performance
fall 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 refine more precisely the nature of programs the
MCA will support, who the beneficiaries will 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 programs that will directly support non-
governmental and civil society activities that may operate independently of the
government. Some advocate that the MCC solicit proposals 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 also
could include projects operated directly by the private sector or NGOs. The draft
legislation submitted to Congress in February 2003 allowed the MCC to issue grants

³³ See, for example, Palley, The Millennium Challenge Accounts: Elevating the Significance
of Democracy as a Qualifying Criterion, p. 13.

to both private and public entities. What may be more problematic is the receipt of
proposals straight from these non-governmental sources. This might result in an
awkward competitive relationship between government and non-government
submissions, a competition that might be best settled by the country itself prior to
transferring recommendations to the MCC. USAID Administrator Natsios told the
House Appropriations Foreign Operations Subcommittee on May 21, 2003. that
while the MCA would likely include programs proposed by non-governmental
entities, the contract would need to be signed by the host government and that the
government 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. Budget
support, infrastructure, and commodity assistance most likely would be large-scale
activities where substantial amounts of resources could be invested, thereby reducing
the total number of projects to be managed and monitored. Community-based or
NGO projects, on the other hand, likely would be much smaller in size and funding
requirements, but far more numerous in totality. While supporting the broadest array
of development programs with MCA funds provides the maximum opportunities,
U.S. policy makers will have to decide whether they are prepared to assume
responsibility for a large number of projects in the MCA portfolio and the associated
management, 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 many
potential MCA countries could be used as the guiding framework in devising
program proposals.³⁴ Recognizing, however, that many MCA countries do not have
sufficient capacity to design program proposals on their own, many suggest that
USAID and others assist — but do not control — the development of program
submissions.³⁵
Congressional action on program issues. The enacted MCA
authorizing legislation permits resources to be provided to a wide range of entities,
including central governments, NGOs, regional and local governments, and private
groups. Assistance may take the form of a grant, cooperative agreement, or contract
with any of these eligible entities. The legislation requires that the United States
enters into a “Compact” with a qualifying country that describes the program to be
funded, how it will be monitored, and how the development goals will be achieved.
The Compact cannot exceed a five year commitment. The measure specifically
prohibits assistance for military purposes, for any project that would likely result in
the loss of American jobs, for projects that would likely cause a significant
environmental, health, or safety hazard, or for abortions or involuntary sterilizations.
The legislation further sets out the process by which the CEO can suspend or
terminate a Compact in cases where the country has engaged in activities contrary to

³⁴ See, for example, Millennium Challenge Account: A Proposed Conceptual Approach for
Eligibility. U.S. Conference of Catholic Bishops, August 13, 2002. Available at
http://www.usccb.org/ sdwp/international/mca.htm
³⁵ Brainard, Compassionate Conservatism Confronts Global Poverty, p. 161.

U.S. national security interests, has taken actions inconsistent with the criteria for
determining MCA country eligibility, or has failed to 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 the
draft bill. Executive officials said that while the MCA should have its own statutory
base separate from existing laws, including the Foreign Assistance Act of 1961,
current restrictions that prohibit U.S. assistance to countries would remain. These
include 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 notable
exception. Countries that currently cannot qualify for U.S. assistance under part 1
of the Foreign Assistance Act of 1961 — that part of the Act authorizing programs
for bilateral development aid, narcotics control, international disasters, the former
Soviet Union, and Central Asia, among others — would remain ineligible for MCA
funds. However, if the President waived any prohibition under Part 1 for a particular
country, 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 authority
to establish and modify in the future a human resources management system without
regard 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 terminate
personnel 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 other
federal 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 approach
that figure would be influenced by anticipated demand as well as larger budgetary
considerations stemming from competing spending priorities, a growing deficit, and
other 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. The
Administration did not provide any projections for FY2005.

³⁶ For example, the President may waive human rights restrictions for Part 1 programs if he
determines that the aid will benefit the needy people of the country (section 116). Likewise,
the President make exempt application of aid cutoffs, based on national interest
requirements, for countries that do not cooperate on narcotics control matters.

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. The
Administration sought a large — $2.6 billion, or 16% — increase in Foreign
Operations Appropriations programs for FY2004, including the MCA funds, but
some 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 Congress and all Administrations for
many years has been the practice of congressional legislative directives and earmarks
in foreign aid authorization and spending laws. Executive officials argue that the
excessive use of such directives, both formal and informal, seriously erodes their
ability to manage foreign policy and operate a coherent 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 and
spending priorities. Some Members point to congressional emphasis in recent years
on initiatives such as child health, basic education, and international HIV/AIDS,
programs that both the Clinton and Bush Administrations subsequently came to
embrace and support with higher budget requests. Without congressional pressure
through earmarks, U.S. commitment and leadership on these policies would not exist
to the extent they do today, many argue. Moreover, some contend that these broad,
sector allocation directives represent priority-setting decisions by lawmakers and
reflect the appropriate and constructive power of Congress to manage the federal
“purse.” It is the far more targeted earmarks, they contend, benefitting special
interests or specific organizations and firms, that are problematic from the
Executive’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 officials
contended that the traditional pattern of congressional directives — specifying
funding amounts for selected countries or activities, and placing restrictions on
certain operations — would undermine the basic principles of the MCA concept.
Legislative set-asides for a particular set of countries or for certain program activities
would arguably undercut the transparent, objective process of selecting the best-
performers.
In settling these differences, one model to examine might be how Congress
authorizes and funds other demand-driven programs in the annual Foreign Operations
appropriation bill. Since it is not known in advance who may request or require
support under programs such as the Export-Import Bank, the Trade and Development
Agency, or international disaster assistance, Congress generally appropriates amounts
that are expected to be needed to meet the resource demands placed on these
activities, with few or no set-asides for specific requirements. Authorizing laws for
these programs include some restrictions, but are generally not nearly as extensive
as those for regular bilateral economic and military aid programs. An important

difference, however, between such programs and the MCA is that their purpose is far
more 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 social
and political values and were congressionally initiated. But the prospect of applying
to an MCA participant these overarching aid prohibitions, especially those that
require an Administration discretionary determination to trigger the aid cut-off, raised
a new set of issues. Would, for example, the extent to which the U.S. has a major
financial investment in a successful MCA project influence a decision on whether to
declare the government in violation of narcotics cooperation standards?
Congressional action on flexibility and oversight issues. For the
most part, the enacted MCA authorizing act refrains from earmarking, providing
authorities consistent with MCA principals set out by the Administration, and
permitting the executive to implement the program with a degree of flexibility. The
measure authorizes assistance “notwithstanding any other provision of law.”
However, countries which are ineligible for American economic aid due to
restrictions contained in the Foreign Assistance Act of 1961 or any other provision
of law cannot be selected for MCA support. This provision will likely eliminate
consideration of a number of countries, although in most cases these countries 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, be used for military
support, or finance abortions or involuntary sterilizations. The statute also adds
several requirements aimed at strengthening congressional oversight of the MCA.
The legislation requires the Secretary of State to post information about the MCA in
the Federal Register and on the Internet, and to submit an annual report on MCA
operations.
Issue: Funding and possible tradeoffs. Following submission of the
FY2004 budget, MCA advocates closely examined two funding issues: the size of
the MCA request and proposals for other U.S. economic aid programs. Many
believed that MCA resources should and would grow in equal amounts of $1.67
billion per year to reach the $5 billion total in three years. Conflicting
Administration statements gave credibility to the view that this was the intention,
although officials have said more recently that this is not the case. For one reason,
since the number of qualifiers the first year is still far from certain, the funding
requirements may be quite different from $1.67 billion.
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 pressures
are likely to continue throughout future budget debates, making the task of
accommodating 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 the
Administration would not take that path. While the FY2004 budget request largely
maintained funding for other foreign aid programs at existing levels — although with

a few important exceptions — congressional appropriators faced limitations in their
ability to fully provide for both the MCA and other aid accounts. The effects of a
war in Iraq and unanticipated foreign policy contingencies arising later in 2003
created new resource demands. When Congress decided on different appropriation
priorities than the President and allocated a smaller amount to the Foreign Operations
funding bill, it set the stage for direct trade-offs between the MCA and competing
security, economic, and humanitarian activities. In addition, the MCA was not the
only Foreign Operations program that was vying for increased spending for FY2004.
The President’s budget included several other new initiatives, including those for
additional HIV/AIDS resources, “topping up” the HIPC debt reduction initiative, a
contingency funds addressing famine and conflict needs. While the overall request
for Foreign Operations was well above FY2003 enacted levels — up 16% — these
new initiatives accounted for most of the increase, leaving continuing programs with
a 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 budget
blueprint was the same — a combined $2.96 billion total for these “core” bilateral
development aid activities. But due to Congressional additions, the FY2003 levels
had increased to $3.23 billion, making the FY2004 request 8% less than enacted
amounts for FY2003. Some argued that these, and similar reductions below FY2003
appropriations for refugees, disaster, and food aid, broke the President’s pledge to
make 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 be
made available for accounts supporting similar activities if this new initiative was not
submitted. It is unclear that in the absence of the MCA or any of the other new
initiatives, that an equivalent amount of resources would have been made available
for other bilateral economic aid programs.
Congressional proposals to modify MCA funding levels. Throughout
the 2003 debate over MCA authorization and appropriation funding amounts,
Congress struggled with the challenge of fully funding the President’s $1.3 billion
MCA request and addressing other foreign aid priorities. Senate bills (S. 1160 and
S. 1426) authorized and appropriated $1 billion for the MCA in FY2004. The
authorization further provided 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 for
FY2004 and FY2005 are set as “such sums as may be necessary.” Elsewhere in the
same Act, Congress provides $1 billion for MCA appropriations in FY2004, $300
million less than requested.³⁷ This appropriation reduction may affect the number of
countries and program proposals selected for FY2004, and the pace at which the
initiative would move forward towards the $5 billion goal by FY2006.

³⁷ This amount was subsequently decreased to $994 million under a provision in P.L. 108-

199 requiring a 0.59% rescission of all accounts in the bill.

CRS-31
ppendix A — Comparison of Administration Proposal and Key Congressional Modifications
Throughout this report, Congressional recommendations to alter key elements of the President’s MCA initiative are discussed. The table below
marizes these changes.
IssueAdministrationSenate (S. 925)^aHouse (H.R. 1950)^aConference (P.L. 108-199)
Board of Directors, chaired byBoard of Directors, chaired by
Board of Directors, chaired bySec. of State, with Treasury,USTR, USAID, MCC CEO, andSec. of State, with Treasury,
Board of Directors, chaired bythe Sec. of State, with4 others nominated by theUSTR, USAID, MCC CEO,
A oversightSec. of State, with TreasuryTreasury, USAID, USTR, andPresident from a Congressionaland 4 others nominated by the
and OMBthe MCA’s Chief Executivelist. Non-voting membersPresident that may come from
ⁱ^{ki/CRS-RL31687}Officer (CEO)list submitted by Congressional
^g/winclude OPIC, OMB, Peaceleaders.
^s^.orCorps, and TDA.
^le^ak
Independent Millennium
^://wikiChallenge Corporation whose
^h^ttpanizationIndependent MillenniumCEO reports to and be underIndependent MillenniumIndependent Millennium
Challenge Corporationthe direct authority and foreignChallenge CorporationChallenge Corporation
policy guidance of the Sec. of
State
CEO “manages” theCEO “manages” the
Corporation, reporting to andCEO “heads” the Corporation,Corporation, reporting to and
CEO of Corporationunder the direct authority andreporting to the Presidentunder the direct authority and
foreign policy guidance of theforeign policy guidance of the
Sec. of StateBoard of Directors.

CRS-32
IssueAdministrationSenate (S. 925)^aHouse (H.R. 1950)^aConference (P.L. 108-199)
Board of Directors may appoint
a confirmed U.S. Government
terim CEO — — — official to serve as interim
CEO until a CEO has been
confirmed by the Senate.
Board of DirectorsBoard of DirectorsCEO of CorporationBoard of Directors
Nine members named by the
CEO to advise on MCA policy,
ⁱ^{ki/CRS-RL31687}CC AdvisoryNoneNonereview eligibility criteria,evaluate the MCC, assess MCCNone
^g/wcapabilities, and make
^s^.orrecommendations to the CEO.
^le^ak
^://wikiFY2004 - IDA eligibleFY2004 - IDA eligibleFY2004 - IDA eligible
^h^ttpFY2004 - IDA eligibleFY2005 - per cap GNP less
than $1,415FY2005 - per cap GNP less thanFY2005 - per cap GNP lessthan $1,415
incomeFY2005 - per cap GNP less than $1,415$1,415
ibilityFY2006 - per capita GNP lessFY2006 - per capita GNP less
FY2006 - per capita GNP lessthan $2,935 only if fundsexceed $5 billion; low-middleFY2006 - per capita GNP lessthan $2,935; low-middle incomethan $2,935; low-middle
than $2,935income countries capped atcountries capped at 20%income countries capped at

20%25%

A government, including aA national government, regionalor local government, an NGO,A national government,
ible entityNone statedlocal or regional government,an international organizationregional or local government,
or an NGO or private entity.and trust funds.or an NGO or private entity.

CRS-33
IssueAdministrationSenate (S. 925)^aHouse (H.R. 1950)^aConference (P.L. 108-199)
10% of MCA funds available15% of MCA funds availablefor countries demonstrating a10% of MCA funds available
d to “near-miss”General supportfor countries failing to qualifydevelopment commitment butfor countries showing a
because of inadequate data orfail to meet a sufficient numbercommitment to MCA criteria
missing one indicatorof performance indicatorsbut fail to qualify
Establishes a period of at least
95 days during which Congress
will receive the list of
“Candidate countries,” the
eligibility criteria and
methodology for making a final
ⁱ^{ki/CRS-RL31687}CEO consultation with Congressselection, and the list of
^g/wDisclosure in Federal Registeron eligibility criteria;“eligible” countries (those that
^s^.orand on the Internet of eligiblenotification 15 days in advancewill receive MCA assistance).
^le^akMCA contracts andcountries, programs supported,on grants exceeding $5 million;Consultation with
ersight andperformance posted on theand performance; proposed“Compacts” with countriescongressional committees will
^://wikiInternet.performance indicators open topublished in Federal Registeroccur during this period and
^h^ttppublic comment; annual reportand on the Internet; advancethe information will be
to Congressnotification of aid termination;annual reports to Congress frompublished in the FederalRegister.
the CEO and Advisory Council
“Compacts” with countries
will be notified to Congress
and published in Federal
Register.
Annual report by March 31.
FY2004 - $1.3 billionFY2004 - $1 billionFY2004 - $1.3 billionSuch sums as may be necessary
FY2005 - no decisionFY2005 - $2.3 billionFY2005 - $3 billionfor FY2004 and FY2005.

FY2006 - $5 billionFY2006 - $5 billionFY2006 - $5 billion

CRS-34
^h^{e s}^t^atu^s^of^th^{e Sen}^a^{te bill is}^bas^e^{d on}^{S. 925, th}^{e Forei}^gⁿ^A^f^f^a^irs^A^c^{t, Fis}^{cal Year 2004, as}^am^en^{ded du}^rin^g^{debate on}^J^u^l^y^{9 an}^{d 10}^.^S.^{925 rem}^aⁱⁿ^s^pen^dⁱⁿ^gⁱⁿ^t^h^{e S}^eⁿ^a^t^e^.
^io^u^s^ly^{, th}^{e Sen}^a^{te Fo}^r^e^igⁿ^Relatioⁿ^s^Co^m^m^{ittee h}^a^d^ap^p^r^o^v^ed^legⁱ^slatioⁿ^au^th^o^r^izin^g^th^{e Millen}ⁿⁱ^u^m^Ch^allen^g^e^A^cco^uⁿ^tⁱⁿ^S.^1160.^A^m^odi^fⁱ^{ed t}^e^x^t^of^S^.¹¹⁶⁰^w^a^s^s^u^bs^equ^eⁿ^t^l^y
ⁱⁿ^to^{S. 925 as}^Divⁱ^sⁱ^on^C^on^J^u^ly^{9. T}^h^{e Hou}^s^e^{bill, H.R}^.^{1950, is}^als^o^{a com}^bⁱⁿ^{ed f}^o^reigⁿ^policy^au^th^orization^m^easu^r^{e to}^w^h^ich^ear^lier^MCA^au^th^o^r^izin^g^tex^t^w^a^{s ad}^d^e^d^.
^o^u^s^{e In}^t^e^rn^atⁱ^oⁿ^a^l^R^e^l^a^tⁱ^oⁿ^s^C^o^m^mⁱ^t^t^{ee h}^a^{d report}^e^{d H}^.^R^.^{2441, w}^hⁱ^c^h^w^a^sⁱⁿ^corporat^{ed, w}ⁱ^t^h^m^odi^fⁱ^catⁱ^oⁿ^s^{, t}^o^H^.^R^.^{1950, a}ⁿ^d^pas^s^e^{d by}^t^h^{e H}^o^u^s^{e on}^Ju^l^y^16.

ⁱ^{ki/CRS-RL31687}
^g/w
^s^.or
^le^ak
^://wiki
^h^ttp

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 and
international development organizations for not contributing enough to fight global
poverty and promote economic growth. Although the United States was the largest
provider of Official Development Assistance (ODA)³⁸ until the early 1990s and was
second to Japan in most years since until 2001, its contribution has been at or near
the bottom of the list of international donors when measured as a proportion of
national wealth.
Figure 1. ODA Performance 2002
In 1972, the United Nations adopted a resolution calling on developed countries to
allocate 0.7% of GNP for foreign economic assistance. This target, which continues
to be cited by many nations and international organizations, was never endorsed by
the United States and has been achieved by only a few, mainly Nordic countries.
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 of

³⁸ ODA is a category used by the Organization for Economic Cooperation and Development
(OECD) to measure and compare the efforts of 22 member countries in supporting global
economic development. ODA includes all concessional and grant economic and food
assistance, excluding export promotion programs and military support. It also excludes
assistance to certain countries that are more economically advanced, such as Israel, Russia,
Ukraine, Poland, and Hungary. Consequently, ODA measures a large part, but not the total
amount of U.S. economic assistance. In FY2003, for example, the United States provided
about $1.2 billion to nations that are not included in ODA figures. Moreover, ODA is
usually reported on a “net” basis — that is, aid disbursements minus loan repayments.
Because of these factors, ODA amounts for the United States are somewhat smaller than
actual economic aid appropriations annually approved by Congress.

aid transfers as a percent of GNP.³⁹ U.S. officials note that in dollar terms, American
ODA has remained substantial, and is programmed on more favorable terms than that
of other donors. The United States, they emphasize, was a leading voice over the
past several years in the Heavily Indebted Poor Country (HIPC) debt initiative, being
the first government to advocate 100% cancellation of bilateral debt owed by the
world’s poorest nations. American charitable organizations and businesses provide
a significant proportion of annual aid transfers and private investment to the
developing world. Given the large amount spent by the United States on defense and
the security it provides to allies and friends around the world, American contributions
to global stability and a stable environment in which economic development can take
shape 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. ODA
will increase — perhaps significantly — especially if other new foreign aid programs,
like the Global HIV/AIDS Initiative, proceed as planned. The Administration says
that the MCA would add 50% to U.S. ODA contributions, and while that figure may
not be reached by FY2006, it is likely to be in the 25-40% range. But on the other
point of measurement — ODA as a percent of GDP — the impact will not be so
dramatic, largely because MCA appropriations are likely to be very small relative to
the size of the U.S. economy and because of projected GDP growth estimates over
the next several years. According to current projections, assistance would rise from
the 2002 level of 0.12% of GDP to 0.15%.

³⁹ In recent years, the World Bank, the OECD, and other institutions have substituted the
term gross national income, or GNI, for GNP in order to conform to revised 1993 System
of National Accounts guidelines. The U.S. government in most cases uses the calculation
of gross domestic product, or GDP. GNI includes GDP plus net receipts of primary income
(compensation of employees and property income) from nonresident sources. For the
United States, GNI is slightly larger than GDP — in 2000, for example GNI was less than
one-tenth of one percent larger than GDP. The calculations in Table 2 and the ensuing
discussion are made based on OMB reported and projected U.S. GDP figures.

Appendix C — Potential MCA Participants:
Country Categories
IDA-eligible, per capita income $1,415 and below
MCA eligible FY2004 and beyond
^Africa^Inc^o^m^e^*^Ea^st^Asia^/Pa^c^if^ic^Inco^m^e^*^La^tⁱⁿ^Am^erica^Inc^o^m^e^*
^Aⁿ^g^o^l^a^$660^Bu^rm^a^*^*^Bolⁱ^vⁱ^a^$940
^Benⁱⁿ^$390^C^a^m^bodi^a^$280^G^u^y^aⁿ^a^$840
^Bu^rkⁱⁿ^{a F}^a^s^o^$220^Eas^t^Tⁱ^m^o^r^$430^H^aⁱ^tⁱ^$440
^Bu^ruⁿ^dⁱ^$100^In^don^esⁱ^a^$680^H^oⁿ^d^u^r^as^$920
^C^a^{pe V}^e^rde^$1,290^Kⁱ^ri^batⁱ^$810^Nⁱ^carag^u^a^*^*
^C^a^m^e^roon^$560^L^a^os^$310
^C^.^A^.^R^.^$260^Mon^g^o^lⁱ^a^$440
^C^h^ad^$220^Papu^{a N}^e^w^G^uⁱⁿ^ea^$580
^C^o^m^o^ros^$390^S^o^l^o^m^oⁿ^Is^l^aⁿ^d^s^$570^$430
^C^oⁿ^g^o^{, D}^e^m^R^e^{p of}^$90^T^oⁿ^g^a^$1,410
^C^oⁿ^g^o^{, R}^e^{p of}^$700^V^aⁿ^u^a^t^u^$1,080
^C^o^t^e^d’^Iv^oi^re^$610^Vⁱ^etⁿ^a^m^$430
^Eri^t^r^ea^$160^Mⁱ^d-^Ea^st^Inc^o^m^e^*
^Et^hⁱ^opi^a^$100^So^ut^{h Asia}^Inco^m^e^*^D^jⁱ^bou^tⁱ^$900
^G^a^m^bⁱ^a^$280^A^f^g^h^aⁿⁱ^s^t^an^*^*^Y^e^m^eⁿ^$490
^G^h^an^a^$270^Ban^g^l^ades^h^$360
^G^uⁱⁿ^ea^$410^Bh^u^t^an^$590
^G^uⁱⁿ^ea-^Bi^s^s^a^u^$150^In^di^a^$460
^K^eⁿ^y^a^$360^N^e^pal^$230
^L^e^s^o^t^h^o^$470^Pakⁱ^s^t^an^$420
^Lⁱ^beri^a^$140^S^rⁱ^L^aⁿ^k^a^$840
^Madag^a^s^car^$240^E^u^rope^Iⁿ^com^e^*
^Mal^a^wⁱ^$160^Eur^a^sia^I^nc^o^m^e^*^A^l^banⁱ^a^$1,380
^Malⁱ^$240^A^r^m^eⁿⁱ^a^$790^Bosⁿⁱ^a^$1,270
^Mau^rⁱ^t^aⁿⁱ^a^$340^A^zerbai^j^an^$650^S^e^rbi^a^$1,400
^Mozam^bi^qu^e^$210^G^e^orgⁱ^a^$720
^Nⁱ^g^e^r^$170^K^y^rg^y^z^R^e^p.^$290
^Nⁱ^g^e^ri^a^$290^Mol^dov^a^$460
^R^w^an^da^$230^T^a^jⁱ^kⁱ^s^t^an^$180
^S^a^{o T}^o^m^e^&^P^riⁿ^cⁱ^p^e^$290^U^z^bekⁱ^s^t^an^$550
^S^eⁿ^e^g^a^l^$470
^So^m^a^lia^*^*
^Sⁱ^{erra L}^e^on^e^$140
^S^u^dan^$350
^T^aⁿ^zanⁱ^a^$280
^T^o^g^o^$270
^U^g^an^da^$240
^Z^a^m^bⁱ^a^$330
^Zⁱ^m^b^abw^e^$480
^*^G^r^os^s^N^a^tⁱ^oⁿ^a^l^In^com^e^{, dol}^l^a^rs^{per capi}^t^a^{, 2002.}^W^o^r^l^{d Bank Annual}^Repor^t^,^2003.
^*^*^P^r^e^cⁱ^se^d^a^t^a^una^vaⁱ^l^a^b^l^e^.

Per capita income $1,415 and below
MCA eligible FY2005 and beyond
^Africa^Iⁿ^com^e^*^E^a^s^t^As^ia^Iⁿ^com^e^*^L^{atin Am}^erica^Iⁿ^com^e^*
^Equ^a^t^o^ri^al^G^uⁱⁿ^ea^—^C^hⁱⁿ^a^$940^Parag^u^a^y^$1,170
^S^w^azi^l^aⁿ^d^$1,180^Phⁱ^lⁱ^ppiⁿ^e^s^$1,020
^Eur^a^sia^I^nc^o^m^e^*^Mⁱ^d-E^a^s^t^{/N Africa}^Iⁿ^com^e^*
^Bel^a^ru^s^$1,360^Morocco^$1,190
^T^u^rk^m^eⁿⁱ^s^t^an^$1,200^S^y^ri^a^$1,130
^U^k^raiⁿ^e^$770^Wes^t^Ban^k^/^G^aza^$1,350
Per capita income $1,416 - $2,935
MCA eligible FY2006 and beyond
^Africa^Iⁿ^com^e^*^Ea^st^Asia^/Pa^c^if^ic^Inco^m^e^*^L^a^t^{in Am}^erica^Inco^m^e^*
^N^a^mⁱ^bi^a^$1,900^Fⁱ^jⁱ^$2,160^Brazi^l^$2,850
^So^uth^$2,600^Mars^h^a^l^l^Is^l^aⁿ^d^s^$2,350^C^o^l^o^m^bⁱ^a^$1,830
^Afrⁱ^c^a
^Mi^cron^esⁱ^a^$2,160^D^o^mⁱⁿⁱ^can^R^e^p.^$2,320
^S^a^m^o^a^$1,420^Ecu^a^dor^$1,450
^T^h^ai^l^aⁿ^d^$1,980^El^S^a^l^v^ador^$2,080
^T^oⁿ^g^a^$1,530^G^u^at^em^al^a^$1,750
^Jam^aⁱ^c^a^$2,820
^Peru^$2,050
^St.^$2,820
^Vⁱ^nc^eⁿ^t^/^G^r^e^na^dⁱ^ne^s
^S^u^riⁿ^a^m^e^$1,960
^So^ut^{h Asia}^Inco^m^e^*^Mⁱ^{d E}^a^s^t^{/N Africa}^Iⁿ^com^e^*
^Mal^dⁱ^v^es^$2,090^A^l^g^e^ri^a^$1,720
^Eg^y^p^t^$1,470
^Iran^$1,710
^Jordan^$1,760
^T^uⁿⁱ^sⁱ^a^$2,000
^Eur^a^sia^I^nc^o^m^e^*^E^u^rope^Iⁿ^com^e^*
^R^u^s^sⁱ^a^$2,140^Bu^l^g^ari^a^$1,790
^Kazak^s^t^an^$1,510^Macedon^{ia, FR}^Y^$1,510
^R^o^m^aⁿⁱ^a^$1,850
^T^u^rk^ey^$2,500
^*^G^r^os^s^N^a^tⁱ^oⁿ^a^l^In^com^e^{, dol}^l^a^rs^{per capi}^t^a^{, 2002.}^W^o^r^l^{d Bank Annual}^Repor^t^,^2003.