July 15, 2004

July 15, 2004 | WebMemo on Trade, Economic Freedom

Congress Should Cut Traditional Foreign Aid, Not the MillenniumChallenge Account

Before the Millennium Challenge Account (MCA) has approved its first project, some in the House of Representatives hope to divert money away from it to fund other programs, including traditional foreign aid, by amending 2005 Foreign Operations Appropriations Bill. Taking even more money from MCA, which Congress is already set to fund below the President's request, would be a mistake.


When President Bush proposed the MCA-a performance-based foreign aid program-he did so out of recognition that traditional foreign assistance had failed to help poor nations to develop. The United States disbursed nearly $259 billion (constant 1995 dollars) in development assistance between 1980 and 2001.[1] Yet the citizens of most recipient countries are no better off today, in terms of per capita gross domestic product (GDP), than they were decades ago; some, in fact, are poorer. Of the 77 countries that received economic assistance between 1980 and 2001 that accounted for at least 1 percent of their 2001 GDP (constant 1995 dollars) and for which per capita GDP data are available:[2]


  • Thirty-three experienced a decline in real per capita GDP;
  • Fifteen experienced negligible real growth-less than 1 percent compound annual growth-in per capita GDP; and
  • Only 29 experienced real compound annual growth in per capita GDP exceeding 1 percent. Of these 29, only eight countries saw growth over 3 percent.

This failure to elicit economic growth has been a tragedy for the poor citizens of recipient nations.


The MCA is an innovative attempt to address this failure and make foreign aid more effective. Under the MCA, nations would be eligible to receive assistance only if they adopt policies consistent with good governance and economic freedom-policies proven to lead to greater prosperity.


Efforts to cut funding for the MCA should be rejected for several reasons:


  1. The MCA is a more effective way than traditional foreign aid to encourage development in poor nations.
    The Millennium Challenge Account represents a fundamental shift in development assistance because it would provide assistance only to countries with a proven record of adopting policies that are complementary and conducive to economic growth.Compared to traditional foreign aid, the MCA would be a far more effective means of providing assistance and of leading poor nations to adopt policies that would encourage economic growth and development with or without foreign assistance.
  2. Congress has already cut MCA funding.
    The FY 2005 Foreign Operation Appropriations Bill now in the House includes $1.25 billion for the MCA-only half the $2.5 billion requested by the Bush Administration. Meanwhile, appropriators continue to support funding for traditional foreign aid, including over $277 million more in funding for the U.S. Agency for International Development (USAID) than the $3.97 billion requested by the Administration. It makes little sense for Congress to pour more money into programs like USAID at the expense of further funding cuts for the MCA, which actually has the potential to help poor countries develop.

    Congress should cut traditional foreign aid, with its proven record of failure, but not the MCA.


It would be a mistake for Congress to divert money away from the Millennium Challenge Account to fund traditional foreign aid programs that have failed to spur development in recipient countries.


Brett D. Schaefer is Research Fellow in International Regulatory Affairs at The Heritage Foundation.

[1] U.S. Agency for International Development, U.S. Overseas Loans and Grants and Assistance from International Organizations: Obligations and Loan Authorizations, July 1, 1945-September 30, 2001, CONG-R-0105 , at www.dec.org/pdf_docs/PNACR900.pdf (June 28, 2004).

[2] World Bank, World Development Indicators Online, 2004, at http://www.worldbank.org/data, and U.S. Agency for International Development, U.S. Overseas Loans and Grants and Assistance from International Organizations.

About the Author

Brett D. Schaefer Jay Kingham Senior Research Fellow in International Regulatory Affairs
The Margaret Thatcher Center for Freedom

Related Issues: Trade, Economic Freedom