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WebMemo #354 on Trade and Economic Freedom

October 22, 2003

Three Keys to MCA Success

By

President Bush proposed the Millennium Challenge Account (MCA) in 2002 as a means to give aid to countries "that have demonstrated a commitment to ruling justly, investing in people, and encouraging economic freedom."

 

MCA legislation passed the House this summer, and the Senate version will be voted on this month. Though the current bills differ in criteria, the final version should:

 

  1. Contain a sunset provision,
  2. Administer the program independently of the State Department and the U.S. Agency for International Development (USAID), and
  3. Focus on sound economic policies as the criteria for eligibility.

These are key issues that will determine if the MCA lives up to its mission.

 

Performance-Based Aid

The President is seeking $5 billion per year when the MCA is fully funded by FY 2006. This funding will be an addition to the $11 billion per year that the United States earmarks to Official Development Assistance.

 

The MCA has the potential to move economies towards self-sufficiency, while reforming traditional foreign aid, where there has been, historically, little return. Many countries have taken the money, promised to do better and then squandered it.

 

Sound Economic Policies

As a performance based foreign aid program, the MCA seeks to eliminate this vicious cycle by requiring countries to have sound policies in place in order to qualify. As President Bush noted in a speech last year, "Sound economic policies unleash the enterprise and creativity necessary for development. So we will reward nations that have more open markets and sustainable budget policies, nations where people can start and operate a small business without running the gauntlets of bureaucracy and bribery." 

 

Since its inception, the Index of Economic Freedom has revealed that open markets are associated with higher standards of living.

 

The focus should be sound economic policy. The final legislation should not be watered down with provisions that have nothing to do with this goal.

 

Independent & Accountable

If administered improperly or in the same method as traditional foreign aid, this program will be doomed to fail. The MCA should not fall under the State Department and USAID simply because they administer foreign aid. The MCA should be administered by an independent agency and should be held accountable.

 

Sunset = Effectiveness

Additionally, the MCA should have a sunset provision. The House legislation has a sunset provision ending the MCA on October 1, 2007; yet, the Senate version does not.

 

Without imposing a sunset, the MCA has the potential to become another perpetual government program. Imposing a sunset will force the MCA to prove its worth by being effective. Countries that do not currently qualify for the MCA will be slow to change if they know the MCA will continue indefinitely. If a sunset is implemented, countries will be motivated to implement sound reforms in order to qualify before the money is gone.

 

As the saying goes, "the devil is in the details." The MCA has the potential to assist and reward developing nations that have chosen to implement sound economic policies. Yet, without sound criteria, good administration, and a sunset provision to keep the program accountable, the MCA will likely become another expensive bureaucratic tool that produces few results.

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