What Does it Mean to Be on the Threshold? Two New Threshold Programs Approved

At the September 12 meeting, the MCC Board approved Threshold programs for Sao Tome and Principe ($8.7 million) and Yemen ($21 million). With the approval of these two Threshold programs, 17 out of 21 currently Threshold eligible countries have funded programs (East Timor plus the three countries that became newly Threshold eligible last November are the four that remain).

Sao Tome and Principe has been Threshold eligible since FY2004. Its program targets the Fiscal Deficit indicator through interventions to help increase tax revenue and the Days and Cost of Starting a Business indicator through new business registration procedures. Because Sao Tome and Principe has shown consistently solid performance on the Ruling Justly and Investing in People categories, improvements to the targeted Economic Freedom indicators could indeed push Sao Tome and Principe over the Threshold to passing. Interestingly, Treasury’s Office of Technical Assistance (OTA) is overseeing the implementation of Sao Tome and Principe’s program, making it the only Threshold program with a lead implementing agency other than USAID (although Treasury and the Department of Justice are involved in cooperation with USAID in a number of other Threshold programs).
Yemen’s program targets five indicators: Rule of Law, Control of Corruption, Political Rights, Fiscal Policy and Government Effectiveness though various electoral, judicial, and investment climate reforms. As you recall, Yemen was suspended (pdf) from Threshold eligibility in November of 2005 due to deteriorating performance on several of the indicators. Since then the Yemeni government has implemented an impressive set of reforms and demonstrated a commitment to continue improvements on its indicators. Yemen should be commended for taking its suspension seriously, actively engaging with the MCC throughout the period of suspension, and initiating important reforms. In that respect, removal of their eligibility suspension was well deserved. But is Yemen ready for a Threshold Program?
When Yemen was reinstated in February, it was still showing below-the-median scores for 13 out of 16 indicators in the most recent data. Current data shows that Yemen will fail the same five of six Ruling Justly indicators again this year, albeit with improvements in Rule of Law, Political Rights and Civil Liberties. We haven’t seen all the new Investing in People or Economic Freedom data yet, but based on partial updates and extrapolating from previous data, my best guess is that they have a shot at passing maybe 6 out of 17 indicators in FY2008. This is still a lower ratio of passed indicators to failed indicators than any other Threshold eligible country, but it is a marked improvement. In a sense Yemen is somewhat of a threshold case for a Threshold program.
We recently raised the question of how MCC is defining and purposing its Threshold program. The program was originally designed to help a handful of countries make targeted reforms to push them over the edge to full eligibility. In the first year of operations, the MCC described selection for the Threshold Program by saying the Board looked for countries that had to improve upon two or fewer indicators in order to meet the full MCA eligibility criteria. In addition, the Board would look for countries that also demonstrated a commitment to undertake policy reforms that would result in improvements in deficient MCC policy indicators. Beginning in FY 2005, however, the MCC applied a less specific selection process, stating only that "Threshold countries are countries that do not qualify for Millennium Challenge Account assistance but have demonstrated a commitment to meeting the eligibility requirements for MCA assistance in the future." This less specific definition has been applied in all subsequent selection rounds, making the Threshold program more of a "risk capital" account to support reformers at critical junctures with the hope (but not an expectation) that the program will help push countries over the hurdle to passing the indicators test. There are benefits to such an approach in terms of creating incentives for tough reforms and in terms of orienting countries to the business model of the MCC as they navigate toward full compact eligibility. But the risk of this more liberal interpretation is that boundaries of inclusion become less clear, making decisions about Threshold eligibility somewhat more arbitrary. With an increasingly tight budget situation, it is probably time for more precision on the mandate of the Threshold Program.