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WebMemo #423 on Trade and Economic Freedom

February 10, 2004

The Millennium Challenge Account: Rewarding Open Markets

By and

Congress approved $1 billion for the Millennium Challenge Account (MCA), a new approach to foreign aid, on January 22. President Bush's mission for the MCA is to "reward nations that have more open markets…." To accomplish the President's mission, the Millennium Challenge Corporation (MCC), which administers the program, should focus on the progress of candidate countries towards more open markets. The Heritage Foundation's annual Index of Economic Freedom measures this progress precisely.

 

Using Heritage's Index of Economic Freedom as an objective guide, the MCC could identify which candidate countries have been working hardest towards the President Bush's goal. The Index measures economic freedom by examining 10 factors: trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation, and informal market activity. As the Index has demonstrated for the past 10 years, countries that open their markets have higher GDP per capita.

 

The following table shows the performance of the 49 countries - out of the 63 that have been designated by the MCC as being eligible to compete for MCA grants - that are also covered by Heritage's Index. The table uses Index data to divide the countries into quartiles according to how much their overall Index scores have improved over the past four years. Countries within each quartile are listed from the biggest improvement to the smallest. The first quartile represents countries that are progressing fastest toward economic freedom and, therefore, would benefit most from the MCA; the fourth quartile shows countries that have improved the least and are the least deserving of MCA grants. 

 

Notice that 10-year average per capita GDP growth rates of these two groups reveal a striking difference in escaping poverty. The countries in the top quartile have almost six times the growth of those in the bottom quartile. Consistent with the President's mission, they are likely to eventually exit aid dependency.

 

The MCC board should seriously consider that those countries receiving the highest ranking in this table receive MCA funds this year. The countries that are chosen this year will set a standard for years to come. Economics, not politics, should be the measurement standard for the MCA to carry out its mission.

 

Improvement in Economic Freedom and per capita GDP Growth

 



 

 

Countries

 

Compound Per Capita GDP Growth Rate (1992 to 2002)

 

 

 

 

1st Quartile

 

Bosnia and Herzegovina*, Mauritania, Azerbaijan, Rwanda, Cape Verde, Nicaragua, Albania, Mozambique, Niger, Georgia, Armenia, Vietnam

 

 

 

 

 

3.7 %

 

 

2nd Quartile

 

Haiti, Chad, Uganda, Kyrgyz Republic, India, Malawi, Ethiopia, Laos, Senegal, Bangladesh, Burkina Faso,

Togo

 

 

 

 

1.5%

 

 

3rd Quartile

 

Republic of Congo, Tanzania, Moldova, Nepal, Madagascar, Yemen, Guyana, Mongolia, Djibouti, Pakistan, Gambia, Guinea, Cameroon

 

 

 

 

0.3%

 

 

4th Quartile

 

Tajikistan, Bolivia, Honduras, Lesotho, Sri Lanka, Indonesia, Ghana, Kenya, Mali, Benin, Zambia, Nigeria

 

 

 

0.6%

*GDP per capita growth is measured from 1994-2002 for Bosnia and Herzegovina.

Source: Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2004 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2004), available at http://www.heritage.org/index.

 

Sarah Fitzgerald is a policy analyst, and Anthony Kim is a research assistant, in the Center for International Trade and Economics at The Heritage Foundation.

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