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The Millenium's Challenge

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The Millennium Challenge Corporation (MCC) is a United States Agency created in 2005 by President George W. Bush. The MCC was headed by Ambassador John Danilovich between 2005 and 2008, a businessman, diplomat and former Ambassador of the United States to Costa Rica and Brazil. In its first fours years of operation since 2005, the MCC has allocated $6.1 billion to 18 countries (11 of which are in Subsaharan Africa) on a basis of conditionality. Countries have to show their explicit interest in obtaining aid from the MCC and to demonstrate their improving performance across a number of indicators that emphasize economic growth. Easterly points out that "The White House said on its website that the new aid was motivated by the idea that 'economic development assistance can be successful only if it is linked to sound policies in developing countries'".

The MCC has been praised as an innovative instrument of foreign aid. William Easterly mentions that "The Millennium Challenge Account of the Bush administration is one interesting experiment in trying to keep money out of the hands of gangsters". Roy Cullen, a former Member of Parliament in Canada and the Head of Anti-Money Laundering at the Group of Parliamentarians Against Corruption (GOPAC) comments that "I believe the Millennium Challenge Corporation is a good idea, we need more of them". Paul Collier comments that "President Bush launched his new Millennium Challenge Account, wisely choosing not to allocate the additional American aid money through the established American aid agency".

What has been the success of MCC in the first four years of operation? Harvard economists Doug Johnson and Tristan Zajonc look at whether foreign can create an incentive for good governance. They study the short history of the Millennium Challenge Account and find positive results.

The Harvard scholars point out that the MCC represents "The most significant shift in US foreign aid policy since President Kennedy signed the Foreign Assistance Act of 1961 that separated military and non-military aid and established the US Agency for International Development".

According to the Harvard economists the MCC's approach to foreign aid is expected to be more effective if it is allocated to countries with good governance. The second expected outcome is that recipient countries will react to the conditional aid by pursuing good policies. Johnson and Zajonc review whether the second expected outcome applies to the case of the MCC. The authors draw two interesting conclusions:

(1) While our results suggest countries are improving their indicators because of the MCC, we make no claim as to what impact, if any, this has on long run growth or poverty rates.

(2) The statistical and anecdotal evidence suggests that when foreign aid is given contingent on past performance, countries respond.

Stephen Kosack of the Brookings Institution looks at how foreign aid is targeted to basic education in countries that show political willingness to improve policy. Kosack reviews the cases of the World Bank and the Millennium Challenge Corporation's ex-ante conditional aid to countries that have previously shown good performance in the number of indicators considered. Kosack argues that aid given to education has not followed the pattern of the MCC in past success stories. He mentions the case of autocratic China, Cuba, Korea or Taiwan. Any of the previous four countries would not have secured aid for basic education from the MCC today.

Kosack's assumption is that MCC-type foreign aid would not be effective if allocated to basic education. This contradicts the results of Johnson and Zajonc reviewed above. What does Kosack understand as efficient in the context of basic education? Kosack mentions the case of Ghana. Ghana was ruled by J.J. Rawlings, who came to power in 1981 through a coup d'etat. The World Bank lent Ghana $260 million in the 15 years following 1986. Other donors followed. Ghana improved its primary education, increasing the number of primary students by 60 percent between 1987 and 2000.

For Kosack "Many democratic governments do depend on the poor and many autocratic governments do not; but there are also many autocratic governments that do depend on the poor -- and that invest in primary education -- and many democratic governments that do not". By selecting ex-ante democratic governments as recipients of MCC grants, the MCC is bypassing many autocratic governments that could be investing in primary education. In any case the MCC's priority does not seem to be health or education, but improving civil and political rights and the investment climate, the type of Western conditionality also incorporated by other European nations to their foreign aid schemes.

Morocco is an interesting example because it received the largest MCC assistance package worth a total of $697.5 million in 2007. The package is linked, as usual, to improvements in areas pertaining political rights, corruption and economic reforms. Morocco held parliamentary elections in January of 2007, but King Mohammed continued to hold the real power that the Parliament lacks. Ambassador Danilovich said at the time regarding Morocco's performance: "It's about poverty reduction and long-term economic growth, it's about good policies. And as long as whatever government is in power pursues good policies, the personnel in that government, as far as the Millennium Challenge Corporation is concerned, is of no great importance."

Lex Riefel of the Brookings Institution and James W. Fox of USAID look at how the MCC may be an opportunity for President Barack Obama. Among their recommendations they include seven steps to strengthen the MCC: more bipartisan support and protection, more flexibility, scaling up, dropping or transferring threshold programs, getting a broader mandate, leveraging foreign investment, and keeping the best that already exists.

Riefel and Fox raise two critical issues in the emergence and success of MCC: (i) the relationship with USAID; and (ii) the partnership with NGOs. MCC became a better friend of USAID after the departure of MCC's first CEO Paul Applegarth. The authors comment that the tension between MCC and USAID takes place at the country level. They point out that "Some USAID missions have seen cuts in funding allocations for their country as a direct result of an MCC compact being signed" (Riefel et al, 2008). For the authors it is unfortunate that USAID has so few macroeconomits if US-led foreign aid targets economic growth as its main objective. For the authors the MCC under Ambassador Danilovich maintained a healthy dialogue with the international NGOs.

Find more about Jaime Pozuelo-Monfort at http://Monfort.ORG