When it comes to spending precious U.S. tax dollars on official
development assistance (ODA) to third world countries, the
Millennium Challenge Corporation (MCC) has a better approach than
the traditional foreign aid model reflected in the mostly
ineffective and costly programs of the U.S. Agency for
International Development (USAID).
The MCC model demands that recipient governments be held
accountable for results and make serious, sustained efforts to
combat corruption. MCC programs also encourage private-sector-led
economic growth, strong protection of property rights, and the rule
of law. Yet in their actions to date, the Obama Administration and
Congress have primarily embraced the USAID approach and have made
significant cuts to MCC funding.
The Trouble with ODA
The trouble with traditional forms of development assistance as
practiced by USAID and other U.S. government entities is that they
are generally "top-down," fragmented, and do not require "feedback
and accountability." Instead, they encourage a
ODA promotes a statist and entitlement mentality among
recipients and has a poor track record with regard to actually
sparking economic renewal. For example, the Organization for
Economic Co-operation and Development (OECD) member countries have
donated nearly $3 trillion in foreign aid since 1960, yet these
donations have largely failed to produce economic growth.
Notwithstanding ODA's poor track record, proponents of
traditional foreign aid are continuously lobbying their powerful
political and academic friends in an attempt to make ODA virtually
self-perpetuating. The most recent evidence of this pressure can be
seen in World Bank President Robert Zoellick's call for "the
creation of a 'vulnerability fund' for developing countries, a
collective pot into which rich countries would put 0.7 percent of
their stimulus packages."
While government assistance programs can be effective in certain
situations (such as for humanitarian disaster relief or HIV /AIDS
and tuberculosis treatment and prevention), for the most part,
private-sector trade and investment is by far the best combination
to spur sustainable economic growth--the bedrock of economic
freedom in any country.
The MCC: A More Promising Approach to
The MCC has a number of advantages over traditional assistance.
MCC programsencourage and allocate aid to countries that embrace
policies linked to economic growth and development. The objective
indicators used by the MCC to determine which countries will
receive funding--"based on their performance in governing justly,
investing in their citizens, and encouraging economic freedom"--mirror those used by The Heritage
Foundation in preparing its Index of Economic Freedom. In
fact, the MCC uses the Index as the source for its trade
policy indicator. Specifically, the MCC bases its decisions
to allocate aid on a country's performance on 17 specific
indicators contained in the table below:
MCC programs also place a greater emphasis on transparency and
accountability than almost any government program.In orderfor
citizens of a developing country to take ownership and
responsibility for their actions, they must have confidence in the
system by which they are governed. This sort of buy-in is crucial
to the success of any development program.
Recognizing this, the MCC has identified corruption as a
critical indicator, noting that "[b]ecause corruption undermines
every aspect of sustainable development, MCC has made fighting it
one of its highest priorities." "MCC asks eligible countries
to consult broadly with its citizens throughout the development,
implementation, and evaluation of a Compact" and "as part of its
own due-diligence procedures, MCC examines the extent to which a
country has conducted a consultative process that reflects real
effort to incorporate domestic civic, private-sector, and political
One of the founding principles of the MCC is to focus
"specifically on promoting sustainable economic growth to reduce
poverty through investments in areas such as transportation, water
and industrial infrastructure, agriculture, education, private
sector development, and capacity building." A hallmark of
underdevelopment is the lack of infrastructure. Building roads,
schools, electricity grids, and water systems usually requires the
sort of major funding that only government can organize.
As of November 2008, Congress had appropriated $7.5 billion to
the MCC, of which approximately $6.5 billion had been obligated for
18 country "compacts." The MCC funds are designated as
"no-year," meaning that they will not expire and MCC does not have
to spend them until it can be certain that the funds will not be
wasted. By comparison, during the same period (FY 2004-2008),
Congress appropriated $52 billion to USAID funds that do expire,
usually within two years, leading to sometimes rash, reckless, and
hurried spending. Sustainable economic growth requires more than a
The MCC administers $5.04 million of assistance per employee.
This is much more efficient than the average for the U.S.
government, which administers only $1.3 million of assistance per
Congress: Clueless about Effective
In the fiscal year (FY) 2009 omnibus spending bill, Congress
shortsightedly slashed the funding for the MCC to $875 million,
more than 60 percent less than the $2.23 billion requested by the
Bush Administration for that year. In its FY 2010 budget
request, the Obama Administration included a paltry $1.4 billion
for the MCC (a cut of more than 40 percent from the FY 2009 Bush
Administration request), while it increased the FY 2010 budget for
the State Department and USAID by 7 percent--to a staggering $48.6
billion. In addition, Congress has already sent
worrisome signals in recent FY 2010 budget resolutions that it
might cut even the Obama Administration's modest MCC
President Obama says he wants to put "the United States on a
path to double foreign assistance," but, given its lukewarm
support of the MCC budget, that means in practical terms that the
Obama Administration intends to increase spending massively for
traditional ODA programs through USAID and other agencies. These
programs will not produce the value-for-money that taxpayers
Spending Aid More Wisely: What the
Administration Should Do
The Obama Administration's development policy should focus
primarily on expanding U.S. private trade and investment in and
with developing countries. The Administration should press Congress
to approve pending U.S. trade agreements with Colombia, Panama, and
South Korea. The Administration should also seek to negotiate
additional trade deals with friendly, large emerging markets such
as India and Brazil.
President Obama and Congress might be tempted to expand, dilute,
or revise the MCC criteria. This would be a serious policy mistake.
If the MCC criteria were altered to eliminate the existing economic
freedom categories, to reduce the currently highest emphasis on
rule of law and anti-corruption efforts, or to dilute them by
expanding the indicators to include more rigid and unrealistic
labor and environmental standards, the resulting MCC programs would
no longer be substantively different than the largely ineffective
and inefficient traditional ODA programs administered by USAID.
The Obama Administration should take other steps to ensure that
any taxpayer funds expended on ODA are spent as effectively as
possible. The Foreign Assistance Act of 1961 should be overhauled
to remove structural impediments that constrain the effectiveness
of U.S. assistance and prevent it from emulating the more modern
aspects of the MCC. Funding for traditional ODA programs
administered by USAID should gradually be reduced, and remaining
USAID programs should be designed using MCC criteria and policy
The Administration should work with Congress to restore the more
than $1.3 billion in MCC funding that Congress cut from the FY 2009
omnibus spending bill and increase the FY 2010 budget for MCC to at
least $2.5 billion--by transferring the difference from planned and
existing USAID programs.
Moreover, the MCC should adhere closely to its original
prioritization of goals, which emphasize encouraging developing
countries to adopt and implement policies to fight corruption,
strengthen rule of law, and take responsibility for their problems.
These criteria should be preserved and remain paramount.
is Research Fellow for Economic Freedom
and Growth in the Center for International Trade and Economics at
The Heritage Foundation.
for example, Raghuram Rajan and Arvind Subramanian, "Aid and
Growth: What Does the Cross-Country Evidence Really Show?" National
Bureau of Economic Research, August 2005, at http://www.nber.org/
papers/w11513 (June 30, 2009).
U.S. Senate, "Senate Report
110-425--Department of State, Foreign Operations, and Related
Programs Appropriations Bill, 2009,"at http://thomas.loc.gov/cgi-bin/cpquery/?&dbname=cp110&sid=cp110bJg6h&
(June 30, 2009); press release, "MCC Compacts Totaling $2.55
Billion Enter into Force in September," Millennium Challenge
Corporation, September 23, 2008, at http://www.mcc.gov/press/releases/documents/release-092308-
billions.php (June 30, 2009).
William Easterly and Tobias Pfutze, "Where
Does the Money Go?" Journal of Economic Perspectives, Vol.
22, No. 2 (2008), pp. 29-52.
MCC, "Selection Indicators."