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The Millennium Challenge Corporation’s (MCC) candidate selection process uses designations for low income and lower middle income countries that are impeding the overall intent of the MCC’s legislated mandate to work with well-governed poor countries.

Three aspects of the candidacy selection system as currently structured threaten to undermine the overall intent of the MCC legislation in a way that poses significant policy challenges to the effectiveness of the MCC:

  1. The number of eligible low income candidate countries has declined and is likely to continue to shrink—even though countries that are said to have graduated from lower income status may continue to have high levels of absolute poverty.

  2. The income line that the World Bank uses to divide low income countries (LICs) from lower middle income countries (LMICs) responds to factors that may not reflect substantial changes in poverty or income levels and that can lead to abrupt graduations and unpredictability in the MCC compact pipeline.

  3. The combination of abrupt graduations that may not reflect reductions in poverty, a 25 percent funding cap on spending in lower middle income countries, and an MCC budget that is much smaller than envisioned when the MCC was created substantially constrains the MCC from doing what Congress intended: working in partnership with well-governed, poor countries to reduce poverty and increase economic growth.

This MCA Monitor Report suggests making a technical adjustment to how graduation from low income to lower middle income classification is calculated is the problem that will otherwise get worse.