More than 20 years ago, the Bush administration very deliberately confronted fundamental questions about how to spend aid dollars most effectively to reduce poverty. The overarching aim was to concentrate aid in countries that needed it most and could best use it, and to fund investments with the greatest potential to promote durable growth, recognizing the wealth of economic evidence that growth is the most powerful driver of poverty reduction. But there were other requirements as well. The new model also had to deploy strict controls for accountability and transparency in use of taxpayer funds. And cost efficiency was a central objective, in terms of both minimal staff administering the funds and maximum benefits per dollar of funding.
The Millennium Challenge Corporation (MCC) was the result. It was a bold innovation, which went far beyond tweaking existing models. In fact, it was so different from existing models that it required the creation of a new independent agency. Trying to graft its approach on existing agencies would not have worked. Like all innovations, it was risky, subject to considerable skepticism, and got off to a slow start as it built the human capital and systems necessary to execute well. Had its staff not been determined to remain faithful to the model, it might easily have failed. It did not.
Now MCC is slated for closure, for reasons inexplicable to those who share the desire for US aid to serve US foreign policy interests and who are informed about MCC’s performance. Others have called out particular MCC strengths, but it’s hard to get a sense of the whole picture. So let’s walk through how the model works and its track record.
MCC only funds poor countries
Many reasonably argue that as countries’ incomes rise, they have more fiscal space and often stronger institutions to fund their own development, and more access to private capital markets. Aid, especially grants, should be concentrated in the poorest countries. By statute, MCC cannot fund developing countries at the higher end of the income spectrum. The current upper limit on per capita income in MCC’s country pool is $7,895. It was just increased by bipartisan legislation passed in December. Support for the model is strong in Congress and there was a desire to expand the number of countries in which MCC can operate.
MCC only funds compacts in countries that are pursuing good policies
The main basis of MCC’s country engagement is the compact; it specifies the projects and policy reforms negotiated between MCC and the country to meet the agreed objectives, as well as MCC finance commitments to support those operations. One of the most innovative aspects of the model is that countries must pass the MCC scorecard to be eligible for compacts. The scorecard has governance indicators assessing whether countries are ruling justly (including controlling corruption), investing in their own people, and safeguarding economic freedom. The indicators are produced by independent third parties, not the US government. That was a deliberate choice to avoid any internal US government politicization of governance assessments. And through the “MCC effect”, MCC’s scorecard can incentivize governance improvements well before countries receive any funding.
Compact development and implementation stop if countries fall off-track
MCC is serious about the scorecard, which countries are held to throughout the process. If countries undergo coups, or illegitimate elections, or violate the rights of citizens, or other developments undercut scorecard performance, even after a compact has begun, MCC leadership and its board have taken action to stop engagement. These decisions that maintain fidelity to the model can be very tough, especially when much effort has gone into compact development and execution.
MCC has a laser focus on one criterion for picking projects: attacking the most binding constraints to growth
MCC compact development begins with intensive joint analysis by MCC and country economists of the binding constraints to growth and the root causes of those constraints. That analysis allows selection of usually 1–3 sectors on which the compact will focus. Often infrastructure gaps are binding constraints to growth—power or transport or water and sanitation. But gaps in social investments—health and education—can also be binding constraints to labor supply and labor productivity. Low or declining productivity in agriculture can also be a binding constraint when that sector is a major share of the economy and employment. Often the choice is hard, but the point is that MCC does not spread its support thinly across the economy. It targets obstacles that weigh most heavily on growth.
MCC maximizes value for money and reports everything
It is one of the few aid providers that undertakes a cost-benefit analysis and computes an economic rate of return (ERR) for every single project in every single compact. The ERRs must exceed a hurdle rate of 10 percent. MCC makes those expected ERRs public and reports them to Congress. Then it re-computes the ERRs at the end of the compact and publishes the ex-post ERRs to guard against the risk of inflating expected returns. That means Congress and taxpayers get the full story—not just the benefits, but how much they cost. And all project results and impact evaluations are accessible on MCC’s website to build a knowledge base that all can use for identifying what has worked best. Publish What You Fund ranks MCC as the third most transparent aid agency (out of 50) in the world.
Project management is locally owned and executed by specially constituted units in recipient countries (called Millennium Challenge Accounts)
These teams of local government officials must deploy strict MCC standards for procurement and other project management practices and policies. Funding does not flow from Washington unless these standards are met. The model does not require extensive US presence in-country. During compact execution MCC has only two Americans on the ground. Local project management has worked remarkably well: no waste, fraud, or abuse. MCC’s audits have been consistently clean.
MCC’s lean administrative budget is the opposite of bureaucratic bloat
We’re not talking about thousands of staff and large amounts of aid dollars. MCC’s staff totals about 300 people that manage about $900 million in annual appropriations. Cuts in MCC staff or programs make no meaningful contribution to addressing US fiscal challenges.
MCC’s compacts last five years
With few exceptions, the money must be spent in that time frame. That focuses recipient country attention and efforts. If project execution lags, the unspent money goes back to the US Treasury.
MCC does not load poor countries with unsustainable debt
MCC offers grants to finance projects and to support policy reforms that make investments productive. Where possible it also uses some of that grant finance to mobilize more investment by crowding in the private sector. If MCC is saved, I have suggested that MCC could be given the authority to offer highly concessional loans as well as grants. That would have the benefit of using the resources as efficiently as possible: 30- or 50-year loans would be affordable for poor countries that are not already heavily indebted, and loan repayments would return money to Treasury.
Unlike many aid providers, MCC can do regional projects
Bipartisan legislation passed in 2018 gives MCC the authority to do regional compacts that knit together neighboring economies. These investments can create regional transport corridors and multi-country markets. For small countries that need regional integration to achieve economies of scale and larger markets, like many in Africa, this is crucial. Implementation has proven difficult, in significant part because there are not that many sets of contiguous countries that pass the scorecard. But that authority has great potential for filling a persistent gap in the aid architecture. With very few exceptions, aid agencies and multilateral development banks struggle to invest regionally.
The United States has a strong national interest in promoting growth in countries that will make it safer and more prosperous as allies and as markets. We know that many of the fastest growing countries in the world are now poor countries, where MCC excels as our most powerful economic development tool. MCC offers an infrastructure investment model that directly competes with that of China in Africa and Asia. We also know that achieving sustained development and growth, spending aid dollars effectively, and changing aid models are all hard. Fundamental innovations in aid agencies are rare. MCC has been an American aid success story when viewed from a whole range of perspectives. The last thing the administration should do is to abandon a successful innovation.
