Guest Column

By Jessica Davidson and Cate Johnston.

Council on Hemispheric Affairs

In 2000, the United Nations launched an effort to eradicate worldwide poverty by 2015, adopting eight objectives called the Millennium Development Goals. In 2004, President Bush, in attempting to address these goals, founded the Millennium Challenge Corporation, which is in charge of allocating grants to a list of carefully selected developing nations. However, after almost two years of operation, the MCC has accomplished surprisingly little. Founding CEO, Paul Applegarth, who suddenly announced his resignation on June 15, left the post on August 8, and only a temporary replacement, Charles O. Sethness, has so far been selected. Although Applegarth’s reasons for departing the position were to spend more time with his family, Andrew Balls, of the Financial Times, reported that his resignation “resulted from falling confidence within the Bush Administration that the flagship aid program was fulfilling expectations.” The question now remains whether this new approach to development aid can live up to its lofty goals or if it will end up being just another Bush administration scheme to further its conservative policy objectives in Latin America as well as in other parts of the developing world.

The MCC at work
The MCC administers the Millennium Challenge Account (MCA), distributing its funds to developing nations that have shown a commitment to the current administration’s democratic principles. At a public outreach meeting on June 16, 2005, Applegarth asserted that, “[w]e are designed to be focused on the very poorest countries,” and to break the cycle of dependency on aid through an emphasis on national sovereignty. The MCC claims to be committed to respecting the autonomy of participant countries and asserts that the home governments, not the U.S, will control the planning and implementation process. However, it is yet to be seen how much control the U.S. will actually exert in the execution of the projects, and questions have already arisen regarding whether the affected publics, as promised, will be meaningfully involved in the development of the individual projects.

To even be considered for U.S. funding, a nation’s per capita income level must be less than $1,465 for fiscal year 2005, which is the International Development Association’s per capita ceiling for receiving assistance. Having met this requirement, the receiving country must also undergo initial eligibility tests to ensure that it governs justly, invests in its people and promotes economic freedom. To pass these tests, a country must score above the median on at least half of the various indicators for each of the three categories. Regardless of performance in other areas, a country is automatically disqualified if it fails the indicator measuring control of corruption. If found eligible, the government may submit a proposal to the MCC outlining projects essential to promoting its development.

There are a number of significant shortcomings inherent in using this type of system to measure eligibility. The use of potentially flawed data can cause inconsistent measurements, which allows for certain countries to be deemed eligible while others are left out: the system’s rigidity may exclude the countries most in need of aid, simply because of unattainable requirements.

Of the 17 countries currently classified as eligible worldwide, 16 have submitted either compact proposals, concept papers, or both, and four of those –Madagascar, Honduras, Nicaragua and Cape Verde – have thus far been accepted and have signed compacts. Sergio A. Membreño-Cedillo, a representative of the Honduran embassy, told COHA that funds for the Honduran project are expected to be disbursed in the near future. The Nicaraguan government is in the final stages of negotiations with the MCC over project details and funding, and hopes to begin program implementation in the next few months.

Compact Signed with Honduras
On June 13, ten months after Honduras first presented its proposal to reduce national poverty, the country signed a five-year, $215 million compact with the MCC. The Honduran government and the MCC have since worked together in developing plans to alleviate obstacles to economic growth, and as stated by Membreño-Cedillo, “[t]he compact funds will allow to put in place an integrated rural development program in a much larger scale.”

The compact enumerates two programs: the Rural Development Project and the Transportation Project. According to Membreño-Cedillo, these two projects aim to reduce poverty and promote growth “by increasing the productivity and business skills of farmers who operate small and medium-size farms and by reducing transportation costs between production centers and national, regional and global markets.” The programs also intend to provide basic services, such as proper health care and access to education to the 64 percent of Hondurans who live in poverty.

Nicaragua Next in Line
On the same day the MCC finalized its agreement with Honduras, it also approved a five-year, $175 million compact with Nicaragua, which was subsequently signed on July 14. The Nicaraguan project is aimed at resolving the problem of tenuous, often disputed, property rights and land titles, improve national infrastructure and increase the volume of agricultural production.

The project focuses on the northwestern area of the country in the departments of León and Chinandega, chosen for their fertile soil and proximity to the borders with Honduras and El Salvador. The MCC initiative will join forces with several other projects already underway in Nicaragua, in particular, those sponsored by the World Bank. In an interview with COHA, Nicaraguan Ambassador Salvador Stadthagen further explained that Nicaragua’s Secretary of Coordination will be key in ensuring the cooperation of his country’s various governmental and non-governmental organizations with the new MCA team. Three specific projects are being implemented in the region, and $22 million is being allocated for the management, oversight, monitoring and evaluation of those projects. Funding is intended make the region a center of economic innovation and high productivity that will foster development throughout the nation.

Overall, Nicaraguan officials are optimistic about the prospects for development established by the MCA-funded projects, with Stadthagen insisting that as a result of the increased aid, “poverty will be reduced significantly in the León and Chinandega area.”

A Step in the Right Direction
According to an April 27 testimony given by the Government Accountability Office (GAO) before the House Committee on International Relations, “studies have found that, in general, countries with low per capita income also score low on corruption indexes.” The launch of the MCC aid program may encourage candidate countries to adopt anti-corruption programs and aim for strengthening democratic institutions in an effort to qualify for development assistance. For example, Nicaragua failed the corruption-related eligibility requirements in 2003 but since then has improved sufficiently to receive approval for an MCA compact. Ambassador Stadthagen asserted that the MCC “has enforced politically our strive for transparency” and is a “positive reinforcement” in Nicaragua’s anti-corruption campaign. He went on to describe the program as “following the new thinking in development cooperation” and proving that “anti-corruption pays.”

The motivation to meet the MCC’s eligibility requirements may also lead to improvements in social services. According to a COHA interview with R. Kristen Hering, Outreach Coordinator for the MCC, “[t]here are noteworthy cases in which countries have significantly improved investment in education, health, gender equality, improved economic freedom and other sustainable investments as a result of pushing for MCA funding eligibility.”

The MCC has also accomplished the admirable goal of promoting in- country ownership of development projects. Hering told COHA that “all MCC programs are designed and developed through a consultative process involving a variety of public, private and civil society groups” within the recipient nations. Taking each country’s individual priorities and unique needs into consideration and allowing governments to develop their own proposals represents a marked departure from the typical U.S. approach to international aid after World War II. As expressed by Stadthagen, the program “takes into account priorities self-designed by recipient countries.” Membreño-Cedillo added that each country takes charge of the implementation of its own plans, noting that “Honduras now has the primary responsibility to run our own MCA program and to meet the goals of the compact.” The MCC’s commitment to country leadership helps ensure the protection of autonomy and national sovereignty.

Too Good to be True?
Despite Washington’s encouraging support for autonomous behavior on the part of U.S. aid recipients, there are reasons to doubt the nobility of U.S. intentions in this regard. The two Central American countries that have qualified for grants—Honduras and Nicaragua— in the past have been strongly supported by both the Reagan and Bush administrations for their corrupt regimes, poor governments, fixed judiciaries and skewed political processes. Though it is a known fact that the late General Gustavo Alvarez of Honduras, renowned for his corruption, worked closely with then Ambassador John Negroponte in the early 1980s for the Contra cause, this same ambassador has kept quiet about his role in the corruption scandals involving Honduran officials during his tenure. There is also reason to doubt U.S. intentions in Nicaragua. In the past, U.S. authorities have offered their full-fledged support to corrupt movements and regimes, which committed rampant human rights abuses, because Washington was far more interested in advancing U.S. national security interests, than backing genuine reform.

Furthermore, the ideological spin that has been given to U.S. policy first under assistant secretary of state for the Western Hemisphere Otto Reich and subsequently under his successor Roger Noriega during the Bush administration, stipulates that aid be distributed only to countries considered staunch U.S. allies, which in practice does not necessarily mean that these countries have properly functioning democracies. In this respect, Nicaragua and Honduras fit perfectly.

Nevertheless, in practice, such virtues can be far from the truth, since Honduras and Nicaragua have recently been granted such accreditation by the MCC, even though they can hardly be considered working democracies. Honduras is seriously deficient in terms of transparency and is known to have one of the region’s most corrupt judiciaries, as well as executive and legislative bodies. Nor has Honduras met its obligations to its own human rights commission to own up to government responsibility for the death squad disappearances and murders of at least 184 Honduran dissidents who were targets of the country’s military-sponsored death squads because they opposed the government’s policies.

Similarly, a properly functioning system of checks and balances has yet to be established in Nicaragua as the courts are regularly manipulated into doing what the government or the country’s leftist and rightist caudillos want them to do. One must question the intentions behind the aid the Bush Administration has allocated to these countries, since both are perhaps democracies in form but hardly in substance.

Fundamental Flaws
Doubts also remain over the degree of citizen ownership and local participation in the drafting of each proposal. For example, Conor O. Walsh, the Catholic Relief Services Country Representative for Honduras, expressed concern before the U.S. House of Representatives Committee on International Relations over the lack of local citizens’ involvement. He said that many individuals felt they were not being adequately consulted and held reservations about a number of proposals because they did not necessarily agree with their specific initiatives. Walsh further stated that in the Honduran countryside, “9 out of 10 people have never heard of the MCC or its stated goals.” Therefore, while individual countries amy retain some autonomy in the MCC aid process, to claim that the development programs are locally designed may be misleading.

Furthermore, while the general ideas and goals promoted by the MCC could represent a promising new U.S. approach to development aid, several important caveats must be taken into consideration. The MCC has gotten off to a discouragingly slow start. Close to two years after its inception, when it should be making final decisions on all of the 16 submitted proposals, the corporation has signed only four compacts and two compact development grants. The financial record of the organization is also of no small concern. Out of its total budget of $2.5 billion, nearly $600 million has been pledged in aid, but as of July 14, the Brookings Institute reported that the amount of “funds disbursed up to this point was insignificant, and consisted almost entirely of overhead costs.”

In any event, the comparatively modest funds available will leave the organization unable to fully fund all current proposals, let alone begin to finance next year’s newly eligible countries. President Bush requested an additional $3 billion funding allotment for 2006 ($2 billion short of his original goal), however the Senate approved only $1.8 billion and the House made an even sharper cut, approving only $1.75 billion. Furthermore with, Paul Applegarth’s resignation on August 8, a mere 15 months after his appointment to the position, the MCC’s future leadership remains uncertain, making the corporation unlikely to predictably be able to improve the speed and efficacy of its efforts.

The Few, The Proud
The MCC’s standards for determining a country’s eligibility also have their limitations. According to the April 27 GAO testimony, 24 countries passed the qualification tests, but only 16 were subsequently listed as eligible. In an interview with COHA, David Gootnick, the GAO representative who testified, stated that no specific reasons were given as to why the corporation excluded eight countries from its final list of candidates. Though one of the MCC’s purported strengths is its transparency, the testimony illustrates that some information about the corporation’s selection process is not readily available. In addition, the Center for Global Development reports that some data used for the eligibility decisions were drawn from private sources, such as non-governmental organizations and national government agencies in individual countries, when information could not be collected in any other manner. This type of information gathering creates a problem because data obtained from such varied sources could lack essential uniformity as governments may base their indicators on shifting standards.

Another significant shortcoming of the indicator system is that it may exclude the countries that are most in need of MCC aid. Ironically, potential recipients may find themselves unable to qualify for a challenge grant based on the very deficiencies that the grant intends to redress. Many impoverished nations must jump significant economic and social hurdles to meet the corporation’s stringent aid eligibility requirements. For example, it is difficult for an impoverished nation to raise health care and education standards to a level high enough to pass the eligibility tests when there are no funds available to do so. By excluding the nations unable to fund the projects necessary to raise their standards, the U.S. may be prematurely abandoning the very countries and people most in need of its services.

The MCC has attempted to address the problem of the exclusion of the most poverty-stricken nations. The Threshold Program is designed to support those countries which have shown a commitment to improvement but must still struggle to begin the reform process. As Hering explained, “assistance will be used to help such countries address the specific policy weaknesses indicated by the country's scores on the sixteen policy indicators that are central to the MCA eligibility criteria and methodology.” Nevertheless, acceptance to this program is still highly selective, and the nations struggling the most could very likely continue to be passed over. Furthermore, changing standards for admission are likely to make becoming a participant in the MCA program even more difficult. The corporation is scheduled to raise the per capita income ceiling (the initial condition for consideration as a participant) from $1,465 to $2,975 for fiscal year 2006. Though the MCC will evaluate the countries in two different brackets based on income levels, poorer nations will face even greater difficulty qualifying, as comparatively wealthier nations, which otherwise have the means to meet indicator requirements, are allowed to compete for aid.

An interesting relationship between the successful efforts of U.S. officials to pass the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) and MCA compacts that had been approved with Central American countries, raises further questions. Andrea Malito, of the U.S. Trade Representative, told COHA that there is a “certain synergy between the two [the MCC’s Central American compacts and DR-CAFTA].” She elaborated, saying that the Committee on Trade Capacity Building within DR-CAFTA helps to ensure coordination among different programs, one of which is the MCC. Economic reform is essential to the efficacy of any free trade agreement and, as Malito noted, the MCC plays this role for DR-CAFTA. Hering further explained this relationship, saying that “[t]he Honduras and Nicaragua programs are complementary to each other and the goals of the DR-CAFTA in that they will both promote increased rural productivity and competitiveness through greater investment in training, market access, trade capacity, and vital transportation infrastructure.”

Though Hering also insisted that “the success of the MCC programs in Honduras and Nicaragua is not dependent upon the passage of DR-CAFTA,” no mention was made of the corresponding effect the programs had on helping to achieve DR-CAFTA’s narrow approval in the U.S House. Nicaraguan President Enrique Bolaños took advantage of a recent ceremony for the signing of the MCC compact to promote the passage of CAFTA before the House vote, making it clear that the two accords were related in the minds of government officials.

MCC agreements with Central America may have played some role in bringing hidden benefits to the U.S, suggesting that the Bush aid invention was much less selfless than it was publicly proclaimed to be. In addition, such anticipated benefits over DR-CAFTA could have caused the MCC to favor Central America, a hypothesis supported by the fact that two of the first four countries approved for funding were Honduras and Nicaragua (they were also the only two Central American countries to be eligible in this first round).

Prospects for the Future
The MCC may add up to be the beginnings of an innovative new approach to jump-start poverty stricken economies that leaves responsibility and accountability largely in the hands of the receiving governments. Through its policy of rewarding those countries that actively and effectively reduce poverty for all their citizens, the organization encourages developing nations to improve upon their own shortcomings, and thus make better use of available aid.

However, while the MCC does look promising for helping to modestly improve economic development worldwide, fundamental flaws may prevent it from even taking off. The slow pace at which MCA compacts have progressed, coupled with the surprised and certainly premature resignation of its CEO, provides for a troubling outlook. Also, U.S. officials, for political reasons, may be tempted to see more than there is to see when it comes to ascribing a high level of democracy, basic civil guarantees, labor rights and the existence of solid representative institutions in a historically corruption region. With its future leadership undecided and barely any funding so far disbursed, there is no telling whether these envisaged compacts will be able to reach the broad range of people for which they were intended, or whether the whole operation will be self-discrediting. While the MCC in theory appears well-intentioned, the organization is not likely to significantly affect enough of the world’s poor to be sufficient on its own as a major U.S. aid strategy.

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This analysis was prepared by COHA Research Associates Jessica Davidson and Cate Johnston.

August 16, 2005

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