Fall 2006

MCA Monitor Update - Fall 2006


This is an occasional newsletter summarizing key events and issues related to the Millennium Challenge Account examined through CGD's MCA Monitor. The MCA Monitor provides rigorous policy analysis and research on the operations and effectiveness of the Millennium Challenge Corporation.

The contents are organized to provide readers information "in brief" and "in depth." The "in depth" section presents more detail, and often includes our views on the content matter. We hope you find this presentation useful and welcome your feedback.

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--Sheila Herrling and Sarah Rose

 

Contents

  1. FY 2007 Eligibility Indicators Announced: Refinements and Additions
  2. MCC Posts FY 2007 Scorecards
  3. CGD Urges Innovation in MCC Financing Instruments
  4. House Committee Approves $2 Billion for MCC FY 2007, but Reauthorization Bill at Risk
  5. Lessons The MCC Must Learn: CGD Reports From The Field and a GAO Audit
  6. MCC Enters Formal Compact Negotiations with First LMIC
  7. MCC Signs 4 New Compacts, Including Largest One Ever
  8. Seven New Threshold Programs Approved, Two More on the Way
  9. CGD Working Group Assesses Measures of Commitment to Health
  10. "MCC Effect" Explored
  11. Recent Papers and Coming Soon From CGD

 

In Brief

1. FY 2007 Eligibility Indicators Announced: Refinements and Additions
The FY 2007 selection round includes changes to the sources of some current indicators. These changes mark improvements to the selection process since they result in increased country coverage, more recent data, and greater comparability across countries. The Freedom House data that is used for the Civil Liberties and Political Rights indicators is rescaled, as is the Heritage Foundation's trade index. The World Bank Insititute's governance indicators that are used for Voice and Accountability, Government Effectiveness, Rule of Law, Control of Corruption, and Regulatory Quality are now updated annually instead of biennially. The Public Expenditures on Health data comes from the World Health Organization (WHO) this year, a welcome move away from self-reported data. The Total Expenditure on Primary Education is also moving away from self-reported data. United Nations Educational, Scientific, and Cultural Organization (UNESCO) data will be the primary source for this indicator this year, and embassy-reported data will be used only secondarily where no UNESCO data is available. For the Inflation indicator, MCC is changing to single-source reporting, using the IMF's World Economic Outlook (WEO) database exclusively.

In addition to these relatively minor (but nonetheless important) changes, the MCC has adopted two new indicators, a Natural Resources Management indicator and a Land Rights and Access indicator. The two new indicators will be used as supplemental data--presented to the Board to inform any discretionary decisions they make about eligibility--for the FY 2007 selection round. A recent CGD paper, Adding Natural Resource Indicators: An Opportunity to Strengthen the MCA Eligibility Process, describes the process by which the MCC arrived at the chosen indicators, the quality of the indicators, and our thoughts about their inclusion. These two indicators are likely to be incorporated fully into the indicators for FY 2008. Exactly how they will be incorporated is still under discussion.

Read the detailed version of this summary

2. MCC Posts FY 2007 Scorecards
The MCC posted the rankings of the 2007 candidate countries, with a Board meeting scheduled for November 8 to select countries eligible for FY2007 funding. The Round Four selection process is going to be very interesting, with decisions that in some cases will set precedents for future selections, including what to do about the four compact countries that fail to pass the indicators test. Look out for our annual review of the rankings and predictions on what countries will be selected..

Read the detailed version of this summary

3. CGD Urges Innovation in MCC Financing Instruments
When the MCA was first introduced, many assumed it would deliver some--perhaps even a large part--of its funding through general budget support. After all, these were countries that were selected for funding because they had strong economic, social and governance policies. But that is not the case. The MCC is delivering all of its funding via traditional project finance. For all the innovation the MCC is bringing to the development assistance arena, it is being quite un-innovative in this aspect. In a new paper, Sheila Herrling and Steve Radelet review the trends in development assistance toward general budget support and propose an option for the MCC to phase in the disbursement of compact funds through increasing levels of budget support to a selection of countries as they prove their capacity to manage and monitor them.

Read the detailed version of this summary

4. House Committee Approves $2 Billion for MCC FY 2007, but Reauthorization Bill at Risk
The House Committee on Appropriations approved $2 billion in funding for FY2007. This is $1 billion below the President's requested $3 billion, but it is $250 million above the FY06 enacted level. This is not an altogether bad outcome for the MCC given the tight budget environment, but it seems increasingly less likely that the MCC will be funded at its original goal of $5 billion per year anytime in the near future. As more countries become eligible, MCC will have to make some serious decisions about how and where to spend its money.The House International Relations Committee passed an MCC Reauthorization Bill that introduces several important changes, including: (i) amending the purpose language from "economic growth" to "the reduction of poverty through sustainable, broad-based economic growth, including by strengthening good governance, promoting economic opportunities, and investing in people, as needed;" (ii) allowing for concurrent compacts; (iii) extending compact duration beyond 5 years if justified; and (iv) adding Congressional notification between final compact negotiation and signature. Passing the bill will be an uphill battle given other Congressional priorities and active MCC lobbying against items (i) and (iv). Current plans are to bring the bill to the House floor the week of November 13th, but it may not qualify for the suspension calendar.

Read the detailed version of this summary

5. Lessons The MCC Must Learn: CGD Reports From The Field and a GAO Audit
Over the last year, CGD's Sarah Lucas has been traveling the Continent of Africa. Her travel blog is a must read, with captivating stories and pictures. During the year, Sarah produced a set of four MCA Reports from the Field, with one more forthcoming from Madagascar. GAO also released a report on July 28, 2006 looking primarily at the first three compact countries - Madagascar, Cape Verde, and Honduras. The GAO found that MCC could improve in several areas including: economic analysis during the compact design phase, participation in compact development, and monitoring and evaluation.The MCC appears to be learning as it goes but the reports show several key common findings. In particular, there is a need for: better consultation and donor coordination, greater demonstration of the poverty impact of selected investments, better communication of the innovative and transformative nature of MCA programs, and greater clarity between the roles of MCC and USAID.

Read the detailed version of this summary

6. MCC Enters Formal Compact Negotiations with First LMIC
El Salvador is the first Lower Middle Income Country (out of two eligible LMICs) to submit a compact proposal to the MCC and enter the due diligence process. The proposal focuses on rural and community development and transportation infrastructure and will likely total over $440 billion. Since MCC can only allocate 25% of any year's appropriated funds to LMICs, El Salvador will be the only FY2006 LMIC compact we see. (Note: four other countries, all LICs, are also undergoing due diligence: Mali, Mongolia, Mozambique, and Sri Lanka)

Read the detailed version of this summary

7. MCC Signs 4 New Compacts, Including Largest One Ever
MCC signed its biggest compact to date - $547 million - with Ghana on August 1, 2006. The bulk of the compact's funds go to agriculture and rural development with a smaller transportation infrastructure component.MCC signed three other compacts in 2006: a $65.7 million compact with Vanuatu focused entirely on transportation infrastructure; a $235 million compact with Armenia, despite an observed downward trend in its Ruling Justly criteria since it became eligible in September 2005 (having passed 5 out of 6 Ruling Justly indicators at the time); and a $307 million compact with Benin focused on port rehabilitation, access to land, financial services for small and medium enterprises, and commercial regulatory reforms.

Read the detailed version of this summary

8. Seven New Threshold Programs Approved, Two More on the Way
Approvals of Threshold Programs took off in 2006. Since January, MCC has approved seven new programs in Jordan, Albania, Tanzania, Paraguay, Zambia, the Philippines, and Ukraine (all have been signed except Jordan and Ukraine, to date). These new programs represent another $173 million to the Threshold Program--all focused predominantly on improving the Ruling Justly indicators with a particular emphasis on controlling corruption in most. To date, an overall $207 million has been committed to nine Threshold Programs, and MCC hopes to add two more by the end of the year: Indonesia and Moldova.

Read the detailed version of this summary

9. CGD Working Group Assesses Measures of Commitment to Health
CGD organized an expert working group to help the MCC assess the quality and appropriateness of its health sector indicators and to examine more broadly optimal measures of countries' commitments to the health of their citizens. The final report observes that the original indicators chosen by the MCC are reasonable options given data limitations, and few improvements are feasible at this time. Some improvements are possible and desirable, however. Of the indicators for which data are now available at an acceptable level of quality, comprehensiveness and comparability, the Working Group found that the best measure of government's commitment to health is the percentage of 1-year-olds immunized with the third dose of diphtheria-tetanus-pertussis vaccine, which proxies the strength of the public health system in providing essential services.

Read the detailed version of this summary

10. "MCC Effect" Explored
Recent research shows that the MCC's benefits may well extend beyond compact countries. Faced with the possibility of receiving MCA grants based on performance on given indicators, countries actively work to pursue sound policies in order to become eligible for funding. Now termed the "MCC effect," various studies show some compelling preliminary evidence of its impact.A similar "MCC effect" may influence data source agencies. There has been a positive trend of increased country coverage, more frequent data collection, or methodology overhaul among the various data sources used for selection indicators. It is probable that the increased attention that MCC's use of an indicator brings to these various data sources provides impetus for improvement.

Read the detailed version of this summary

11. Recent Papers and Coming Soon From CGD

Check out our recent papers:

And be on the lookout for our upcoming paper:

  • Round Four of the MCA: Which Countries are Most Likely to Qualify in FY2007?

 

In Depth

1. FY 2007 Eligibility Indicators Announced: Refinements and Additions
MCC announced several changes to the indicators for the FY 2007 selection round. These modifications are, for the most part, a result of improved methodologies, increased country coverage, or increased frequency of reporting, and are therefore a welcome change.

Freedom House, the source of the Political Rights and Civil Liberties indicators, released its 2006 data using a new methodology to aggregate the score of the seven subcomponent scores (which are also published for the first time this year). The aggregate scores are now based on a 0-40 scale for Political Rights and a 0-60 scale for Civil Liberties, instead of the previous 1-7 scale for both. This rescaling allows greater differentiation between countries and thus more meaningful comparability. Furthermore, to facilitate better trend observation, Freedom House also publicized the rescaled versions for 2003-2005.

This year marks the first year of annual reporting of the World Bank Institute's governance indicators from which Voice and Accountability, Government Effectiveness, Rule of Law, Control of Corruption, and Regulatory Quality are drawn. Whereas before scores were updated only every other year, they now reflect annual changes.

Inflation figures this year will be taken exclusively from the IMF's World Economic Outlook (WEO) database. This eliminates multiple-source reporting and enhances consistency.

The Heritage Foundation is rescaling the trade index found in their Index of Economic Freedom which will allow for greater comparability among countries and pick up on more subtle improvements or deteriorations in performance. Unfortunately, the updated data used in the FY2007 selection process will not be publicly released until January.

Due to improvements in data collection and updated data, Public Expenditure on Health now comes from the WHO which marks a welcome move away from self-reported data which was less accurate and/or comparable.

Public Expenditure on Primary Education data will be taken primarily from UNESCO this year, using embassy-reported data only as a secondary source where no UNESCO data is available. As UNESCO increases its country coverage, MCC plans to move further away from self-reported data.

In addition to these source changes, the MCC Board also approved two new indicators--Natural Resources Management and Land Rights and Access--for use as supplemental data for FY 2007. The two indicators emerged out of an 18-month broadly consultative and public process with extensive weigh-in from a variety of environmental and land groups. In our view, the openness of the process was commendable with one exception: the use of the International Finance Corporation's (IFC) Doing Business data as part of the final composite land indicator was never publicly announced in advance of the Board's adoption of the indicator.

The Natural Resources Management indicator is compiled jointly by Columbia University's Center for International Earth Science Information Network (CIESIN) and the Yale Center for Environmental Law and Policy (YCELP). It measures four components, each weighted equally in a composite score: eco-region protection, access to improved water, access to sanitation, and child (ages 1 to 4 years) mortality. We find this to be a credible choice for a natural resources indicator since its selection was based on thorough consultations, it has broad country coverage, and it is comparable across countries. However, the water and sanitation data the indicator uses come from WHO and UNICEF, and in the past these have been updated very infrequently--only every ten years or so. While the MCC has commitments from WHO and UNICEF to increase data collection to 3 to 5 year cycles--a step in the right direction--it is still suboptimal for assessing annual changes.

The Land Rights and Access indicator is a compilation of the International Fund for Agricultural Development's (IFAD) Access to Land score and the IFC's Time and Cost to Register a Property scores from the Doing Business Survey. The IFAD component measures: the extent to which the law guarantees secure land tenure for the poor; the extent to which the law guarantees secure land tenure for women, indigenous peoples, and other vulnerable groups; the extent to which land is titled and registered; the status and functionality of formal land markets; and the extent to which the law provides regulation for the allocation and management of communal lands. It is complemented with the IFC data which fills in some gaps in the IFAD data. The IFC measures focus more on efficiency and track more actionable changes, while IFAD's focus is on equity and measures changes that may take much longer to take hold. Conceptually, we see the land rights indicator as one that makes a lot of sense since clear legal status of land holdings and ease of registering and transferring title are likely to lead to stronger management and care of land as a resource and greater ability to use land appropriately as an economic asset, thus making strong links to economic growth and poverty alleviation. However, we note some weaknesses to the indicator. The IFAD indicator is new, so it remains untested, and in its current form some limitations--particularly, subjectivity in survey questions and inconsistency across regions--exist, although IFAD is working to address some of these issues. Country coverage is also something to note. We were pleased to see that in the 2007 Doing Business Report, released mid-September, country coverage by IFC for MCA eligible countries increased, although even with updated data, the Land Rights and Access Indicator has one of the lower rates of coverage of all the indicators.

MCC is planning to use the two new indicators only as supplemental data for the FY 2007 selection. The scores will be presented to the Board of Directors (with special emphasis) for their use in making discretionary decisions about eligibility. Pending Board approval, MCC is planning to use the indicators as part of the regular selection process for FY 2008. To give countries some time to respond to the new measures, country scorecards will be re-posted sometime after November with the new indicators included. In order to do this, MCC will have to make a decision on where to place the indicators. They are proposing to place both in the Investing in People basket. There are certainly logical reasons why both fit that category. With its measures of health inputs and outputs, the placement of the Natural Resources Management indicator in Investing in People is fairly undisputed. We see categorizing the land indicator as Investing in People as more controversial. MCC makes the argument that land rights give people greater security around an economic asset and a social safety net which allows them to make human capital investments they might not otherwise be able to make. While the argument has some merit, ultimately we do not find it compelling. The same argument can be made for almost any of the 16 indicators. The Land Rights and Access indicator fits better in the Economic Freedom category. Improving land rights and increasing access to land will strengthen the value of land as an economic asset, either directly or for productive purposes (e.g., for cultivation, to locate a business, or to use land as an asset that can be pledged as collateral of other indirect purposes). An important point is that the enhancement of economic value is the link between the land index and management of natural resources, which was the original motivation of the indicator search.

For a more detailed discussion on the two new indicators, check out CGD's paper, Adding Natural Resource Indicators: An Opportunity to Strengthen the MCA Eligibility Process.

2. MCC Posts FY 2007 Scorecards
The MCC posted the rankings of the 2007 candidate countries, with a Board meeting scheduled for November 8 to select countries eligible for FY2007 funding. The Round Four selection process is going to be very interesting, with decisions that in some cases will set precedents for future selections. Look out for our annual review of the rankings and predictions on what countries will be selected. Early notables in Round Four include:

  • 4 of 9 compact countries fail this year: Ghana, Benin, Madagascar and Cape Verde.
  • Morocco--a soon to be signed compact--graduates to lower middle income status and fails.
  • The Gambia--suspended last year for policy slippages--passes this year. Will the suspension be removed?
  • Georgia passes, finally!
  • Bolivia passes--will politics enter into the selection process?
  • LMIC pressure to sign--with El Salvador consuming the entire FY2006 LMIC budget and
  • Namibia's proposal in, LMIC funding is going fast.
  • The natural resources management indicators are listed on the scorecard. What would the impact have been of applying them in the FY2007 eligibility process?

We will tackle these issues and more in our upcoming Round Four of the MCA analysis.

3. CGD Urges Innovation in MCC Financing Instruments
In their new paper, Should the MCC Provide Financing Through Recipient Country's Budgets? An Issues and Options Paper Sheila Herrling and Steve Radelet argue that the MCC has the opportunity to break new ground with an innovative approach that both provides appropriate oversight of its funds and creates the incentives for governments to strengthen their fiduciary and financial management systems.

They would like to see the MCC provide a limited portion of its financial flows through the budget in a subset of MCC-eligible countries that meet a specified standard on a measurable assessment of fiduciary and financial management systems and to increase the share of its funds provided in this way as recipient countries strengthen these systems over time.

They argue that this structure would provide very clear incentives for countries to improve their critical fiduciary systems to better manage their own development. Properly designed and incentive-based, this approach would help strengthen the recipient government's budget, evaluation and supporting financial institutions (rather than weaken them as with current practices) and help establish the budget in its proper place as the key mechanism to determine national priorities and allocate scarce resources among competing goals. Since recipient governments typically prefer to receive funding through their budgets rather than through a separate unit, the system would create the internal incentives for countries with weaker systems to meet the minimal standards, and for countries meeting the minimal standards to strengthen their systems over time. Ideally, several years down the road when countries negotiate new compacts, their financial systems will have strengthened sufficiently that an even larger share of MCC funds can go through the budget. They key point is to use the MCC structures to create the internal incentives for countries to strengthen their own fiduciary and management systems, rather than simply concluding that the systems are no good and working around them.

The impact could be substantial and would go well beyond MCC funds. It would help build transparency, accountability and strong fiduciary practices, reduce malfeasance and corruption in the budget, and strengthen complementary parliamentary and civil society mechanisms for oversight. This approach could significantly leverage the impact of MCA funds by making government budgetary funds much more effective in fighting poverty and stimulating development.

4. House Committee Approves $2 Billion for MCC FY 2007, but Reauthorization Bill at Risk
The House Committee on Appropriations passed the FY07 Foreign Operations Appropriations bill allocating $2 billion of the $21.3 billion in foreign assistance funds to the Millennium Challenge Account. This amount is about $1 billion less than the $3 billion the President requested, but it is $248 million above last year's funding levels. Though this is a reasonably good outcome for the MCC given the tight budget environment due to the government's ongoing commitments to Iraq, Afghanistan, and New Orleans, it seems increasingly unlikely that MCC will be funded at its initially-requested $5 billion per year in the near future. With a tight budget constraint and ever-more countries securing eligibility, MCC is going to have to make some tough decisions about how to allocate its funds. More countries without appreciably more money forces a tradeoff between more, smaller (read: less transformative) compacts and fewer, larger compacts. For the latter to be a viable option, MCC will have to ensure consistency and transparency in making decisions about which countries to fund. This conundrum is discussed more thoroughly in CGD's 2005 paper The MCC Between a Rock and a Hard Place: More Countries, Less Money and the Transformational Challenge which was written in reference to the FY 2006 selection process, but still holds true.

The House International Relations Committee passed an MCC Reauthorization Bill that introduces several important changes, including: (i) amending the purpose language from "economic growth" to "the reduction of poverty through sustainable, broad-based economic growth, including by strengthening good governance, promoting economic opportunities, and investing in people, as needed;" (ii) allowing for concurrent compacts; (iii) extending compact duration beyond 5 years if justified; and (iv) adding Congressional notification between final compact negotiation and signature. Passing the bill will be an uphill battle given other Congressional priorities and active MCC lobbying against items (i) and (iv). Current plans are to bring the bill to the House floor the week of November 13th, but it may not qualify for the suspension calendar.

5. Lessons The MCC Must Learn: CGD Reports From The Field and a GAO Audit
Over the past year CGD's Sarah Lucas has been traveling throughout Africa. As her travels take her through MCC countries in various stages of compact or Threshold program development, she reports on the process and offers insight from an in-the-field perspective on what the MCC is doing well and what it needs to improve. There are four Reports from the Field: Mozambique, Malawi, Ghana, and Tanzania. Each report provides country-specific details on the compact or threshold program development process, but some overall trends clearly emerge:

  • MCC needs to foster a better balance between ownership and guidance. While a hands-off approach keeps the MCC from pushing an agenda and keeps national governments in the driver’s seat, it can result in frustrations, lost time, and miscommunications. In Malawi, according to one in-country USG official, the initial phase of Threshold program development included a frustrating round of "the guessing game," during which the MCC was reluctant to offer any indication about an appropriate size or scope for the proposal, although guidance improved as the process went on. Similarly, in Mozambique, according to one government official, "We did not get enough hints about appropriate sectors or a ceiling on available finance." Several people commented that "it was clear the MCC had an agenda," but instead of stating it, they merely hinted at it. This kept country officials guessing until they landed on ideas that matched the MCC's priorities. In Tanzania, a later MCA country, Sarah found improvements in the ownership-guidance balance with MCC engaging early and making expectations clear while still keeping Tanzanian officials in charge.
  • MCC must work toward better collaborative efforts with other donors in MCA countries, and define the MCC-USAID relationship in particular. Risks of a lack of coordination include repeating past mistakes, complicating matters (ie. creating even more dedicated government agencies in an already strapped bureaucracy), and angering development partners. MCC has made steps to engage with other donors on the ground, but it mustn’t assume it has covered its bases without making sure that its attempts to coordinate match with other donors’ needs and expectations of engagement. The MCC-USAID relationship needs special attention. Early stories from the first-round of eligible countries highlighted a discord between the MCC and USAID, the MCC restriction on USAID support in proposal development, confusing signals from USAID Washington about missions' responsibilities in both Threshold and Compact programs, and the MCC's reliance on USAID for logistical support but not for substantive programmatic planning. Three years into the MCA experiment it seems that the animosity is subsiding, but the relationship is neither clearer nor more formalized.
  • MCC should define its expectations for consultation and better monitor countries' compliance with them. Sarah reports that Mozambique's consultation was poorly managed, however, since it was an early round country, it did not benefit from MCC's consultation guidelines that have since been posted--a step in the right direction. Ghana did have access to the guidelines, and its consultative process, despite good initial engagements, was ultimately weakened by a diminished role of the private sector and weak follow-up with NGOs, a sign that the MCC should pay more attention to compliance throughout the process. The Tanzania case raises important questions about the approach MCC should use when the country has already undertaken broad, albeit not MCA-specific consultation (for a PRS, for example). Using prior civic participation as a foundation for proposal development can enhance the efficiency of the process and speed it along, though there must still be space and time for MCA-specific consultations. MCC should further define its position on the role prior consultations can play.

Though areas for improvement are found in all Reports from the Field, notably, Sarah finds in her most recent report on Tanzania that MCC is applying many lessons learned to address some of the issues flagged as unsatisfactory in earlier MCA countries.

GAO also identifies some lessons MCC must learn. GAO's audit of MCC operations in Madagascar, Cape Verde and Honduras--the first three compacts--was released on July 28, 2006. Though the GAO recognized that compact development procedures are becoming more firmly-established as the MCC matures, as Sarah's Tanzania report seems to illustrate, the report highlighted a few areas in need of improvement:

  • Due diligence activities, both ex-ante diagnostic (economic rate of return and poverty/social impact assessment) and overall program monitoring and evaluation strategies are weak. Due to problems of data quality, the initial analysis of certain projects' economic impact may not have reflected actual country conditions. Unreliable benchmarks may make any measure of progress toward a goal less meaningful.
  • Participation in the compact design process was fairly limited in Madagascar and Cape Verde. This was attributed in part to vague guidelines which have since been clarified (though, as we've heard, the quality of consultations has remained problematic in various compact countries since then).
  • The Project Implementation Unit (PIU) approach to managing MCA programs trades off efficiency/implementation speed for capacity and fiduciary institution building.
  • Local understaffing at the beginning of compacts makes it harder to achieve all goals within the compact period.

GAO's monitoring and evaluation recommendations for MCC bear particular mention, not only because M&E is a critical tool for enabling MCC to adhere to its unique mission of enforcing accountability, but also because timely, methodologically sound impact analyses can be the best way to inform the design of future development initiatives undertaken by other donors, NGOs, and developing country governments. As discussed in CGD's Evaluation Gap Working Group report, there is a dearth of good impact evaluations. For MCC to become a leader in accountable and effective development programming, it should pay particular attention to GAO's recommendations to improve its M&E by: ensuring the reliability of baseline data collection, clearly linking outcome targets to the economic justification of a project, instituting clear policies for establishing and adjusting targets, and developing early on a design for randomized controlled trials for use throughout the projects' lifecycles. Importantly, the MCC and recipient countries need to exert greater energy and resources to these activities at the outset, not well into the program's implementation.

It will be worth keeping an eye on these issues raised by GAO to see if they are, as the State Department claims, merely transitory, due to the infancy of MCC's compact implementation processes and still evolving policies and procedures. We hope that future field investigations can offer some insights as more countries begin negotiations and as current countries enter compact implementation.

6. MCC Enters Formal Compact Negotiations with First LMIC
The MCC is in final negotiations with El Salvador, one of two lower middle income countries (LMICs) deemed eligible in FY2006. Over the last year, we've heard bits and pieces of feedback from NGOs on the ground. Together with a review of the actual proposed compact, here are some thoughts on the process so far:

  • Donor coordination appears strong...at least on paper. A donor coordination framework on page 6 of the proposal nicely lays out the compact's plan to develop the North Zone and includes how funding responsibilities will be shared among MCA, the government, and other donors. It is noteworthy that the government offers counterpart funding for every aspect of the compact (except M&E).
  • Road to growth, but with poverty reduction? El Salvador is another road-dominated compact, namely a highway to the North Zone and a network of connecting roads. While in theory highways and rural roads can better connect the poor to growth--and infrastructure in developing countries has been under-funded over the last decade-- there is no evidence that El Salvador conducted a real poverty impact assessment that evaluates exactly who will be served, how many people will actually benefit, and if the roads will serve their needs.
  • Adequate consultative process? Since El Salvador is using MCA money to partially fund a pre-developed strategy for the development of the North Zone, the consultations for proposed projects actually started back in 1998. While there are certainly efficiency gains to building off a prior process, it is necessary (and required!) that a country consult with stakeholders about the MCA compact specifically regarding prioritization, beneficiaries, etc. The government held its MCA-specific consultations between January and March of 2006 incorporating a wide range of sectors and covering 62% of the country's municipalities (78% of the North Zone's municipalities). However, some NGOs on the ground are saying that these meetings were disingenuous, without reflection that their input was accepted or not (either by being included in the proposed compact or by being provided with rationale for rejection through feedback to consulted groups). The El Salvador consultation process leads to the question of what kind of weight should prior (non-MCA) consultations be given as a basis for the MCA consultative process? This is a complicated issue, but we believe that the MCC should, at a minimum, raise the existing bar on consultation in countries.

These questions about the El Salvador compact are not new in a general sense. We have raised similar issues in other compact countries over the last year or so. The El Salvador case, however, raises the question of whether we should expect more of LMICs.

The El Salvador compact also raises some more general questions around the MCA's longer term strategy of engaging LMICs. Since MCC is limited by law from allocating more than 25% of its annually appropriated funds for LMIC compacts, the El Salvador compact--estimated at $446 million--precludes other compacts for 2006. This is not a problem this year as there were only two eligible LMIC countries, but what are the implications for future years? Namibia will probably qualify again, as will several more presumably. Even in the most optimistic situation, 25% of a $3 billion appropriation is only $750 million, which spread across several countries, raises questions of the ability to bring transformational impact.

7. MCC Signs 4 New Compacts, Including Largest One Ever
Ghana
MCC signed its biggest compact to date - $547 million - with Ghana on August 1. The compact has large agriculture and rural development components as well as a transportation infrastructure program. The Ghanaian government hopes the compact will drive the reduction of poverty by 5% annually over 10 years and directly create 700,000 jobs over the next 5 years.

The day after the compact signing, CSIS hosted a panel discussion on the compact, prefaced by remarks by Ghanaian President John Kufour and MCC CEO John Danilovich. Undoubtedly, the Ghanaians and the MCC were delighted with event, which offered praise for Ghana's commitment to development and the MCA process. Ghana certainly deserves the praise--it is a beacon of good governance, stability and progress in West Africa, which is reflected in its performance on the MCC selection indicators. Ghana's commitment to such an ambitious compact is laudable. However the more interesting exchanges that typically arise in events like this--the ones that push participants to defend or elaborate on the more complex issues in the compact development and implementation process--were notably absent. Questions and issues like those raised by CGD's Sarah Lucas in her Field Report on Ghana remain unclear: How does the compact synergize with other donors' development efforts? Does adding MCC-specific oversight structures complicate Ghana's already crowded bureaucracy and detract government attention from other donor and self-financed development programs? How exactly are the compact's programs linking the poor to the hoped-for economic growth? Was the social infrastructure component of the compact really ready for prime-time? Now that the compact is signed it seems that MCC and Ghana are forced to figure out along the way how these factors play out.

Of note, the Ghana compact will use a distinctive approach to monitoring and evaluation modeled on randomized clinical drug trials, implemented jointly by MIT and a Ghanaian research institution. MCC will randomize what interventions are undertaken for which groups in order to gain a better sense of program impact. President Kufour also called for independent reviews of the compact process and progress during its various stages of implementation. In late August, Ghanaian financial journalists announced the launch of their own MCA Watch to monitor projects and disbursements under the compact. Much like in-country civil society monitoring mechanisms set up to track the use and impact of debt relief under the Heavily Indebted Poor Countries program, this organization can play an important role in promoting accountability and lessons learned under the program.

Armenia
The MCC signed a $235 million compact with Armenia on March 27, 2006. The compact allocates $146 million to agricultural and rural development programs including the rehabilitation of irrigation infrastructure, agricultural technical assistance, and improving access to credit for farmers. The compact provides another $67 million for rural road development. The compact went ahead despite MCC concern (as well as concern from international monitoring groups and NGOs) that Armenia was slipping on political rights and freedoms. The MCC issued the Armenian government a letter of concern in December of 2005. The response from Armenian Foreign Minister Vartan Oskanian to their warnings apparently provided sufficient comfort for the MCC to proceed to signing three months later and, one assumes, the eventual disbursing of funds (though the compact has yet to enter into force). It wasn't hard for Armenia to meet the conditions set out in the MCC's letter--they "acknowledged the issues" and "committed to address them."

Vanuatu
The MCC signed a $65.69 million compact with Vanuatu on March 2, 2006. The compact focuses entirely on transportation infrastructure with provisions for the construction and rehabilitation of roads, wharfs, airstrips, and warehouses as well as institutional strengthening of the Public Works Department. Its stated poverty impact comes from reducing transportation costs and increasing market access for the poor.

The Vanuatu compact, due to its small size, has been the fastest to enter into force of any compact to date. While other compacts have taken an average of 3 to 4 months (10 months for Nicaragua and 6 months and counting for Benin!) to go from the signing ceremony to the first disbursement of funds, Vanuatu's got off the ground in less than two months. While a one-sector, $65 million compact in a tiny island state cannot serve as a model for a half billion dollar compact that covers a variety of projects in many sectors (not to mention a larger physical territory), it does serve to highlight the time gap between signing and implementation in other countries, which raises questions about what the MCC and the partner country are resolving during that time.

Benin
On February 22, 2006, Benin and the MCC signed a $307 million compact. The Benin compact is perhaps the broadest in scope in terms of the variety of projects it funds including: port rehabilitation, access to land/property titling, financial services for micro, small and medium enterprises, and a number of commercial regulatory reforms. Interestingly, the commercial regulatory reforms--the establishment of a commercial court, the setting up of arbitration capacity, and the facilitation of enterprise registration--are the only projects of any compact to date that are categorized by the GAO as justice programs.

Also notable about the Benin compact is that, on the heels of the MCC's experience with approving Armenia's compact, MCC CEO Ambassador John Danilovich appeared to place conditions on the Benin compact approval:

"The upcoming election is a significant milestone in Benin's history and continued participation in the MCC program requires that a successful election be held on the agreed date and according to the terms of Benin's constitution."

This looked like more of a hard requirement than Armenia faced, and, depending on how the MCC defines "continued participation in the MCC program," it looks strikingly similar to classic foreign aid conditionality. Some people are clamoring that this kind of conditionality is contrary to the MCC's "country ownership" principles, but our view is different. We see this as a positive signal that the MCC is reinforcing the principles upon which it was founded. That said, with the Armenia case, the Benin case, and the suspension of The Gambia in June, it may be time for MCC to introduce a hard democracy hurdle into its selection criteria to ensure greater consistency in deciding who gets funding and who doesn't.

8. Seven New Threshold Programs Approved, Two More on the Way
MCC has approved seven new Threshold programs since January 2006: Albania, Tanzania, Paraguay, Zambia, the Philippines, Ukraine, and Jordan (all have been signed except Ukraine and Jordan). These new programs represent a new commitment of $173 million, which brings total Threshold Program commitments to $207 million including the Threshold programs in Burkina Faso and Malawi which began in 2005. MCC announced that they expect to sign two more by the end of 2006: Indonesia and Moldova.

The MCC established the Threshold Program to help those countries that are near eligibility and committed to reform to improve their rankings on MCA policy indicators. All but one Threshold program focus on improving the Ruling Justly indicators, with a particular emphasis on controlling corruption in the recipient country. Burkina Faso is the one outlier with a program dedicated to improving girls' education. It should also be noted that Jordan's program, which does focus on improving performance on the Ruling Justly indicators by aiming to strengthen voice and accountability, also contains trade reforms.

CGD created a chart to compare MCA Threshold countries, listing which indicators failed at the time of Threshold eligibility and what reforms the Threshold Program targets.

9. CGD Working Group Assesses Measures of Commitment to Health
CGD convened a Global Health Indicators Working Group to examine potential measures of a government's commitment to health, with the goal of identifying and recommending a set of indicators for consideration by the Millennium Challenge Corporation and other donors as they assess country eligibility for investment. The Working Group released its final report, Measuring Commitment to Health, in September.

The overall observation of the Working Group was that the original indicators chosen by the MCC are reasonable options, given data limitations, and few improvements are feasible at this time. Those indicators are: 1) total expenditures by government at all levels on health divided by GDP, as reported by national governments (note that MCC is using WHO data this year for this indicator, replacing the need for national government reporting--see item 1); and 2) the average of DTP3 and measles immunization rates for the most recent year available from the WHO. Some improvements are possible and desirable, however. Of the indicators for which data are now available at an acceptable level of quality, comprehensiveness and comparability, the Working Group found that the percentage of 1-year-olds immunized with the third dose of diphtheria-tetanus-pertussis vaccine is the best measure of government's commitment to health since it proxies the strength of the public health system in providing essential services. (This removes the measles component from the current indicator.)

The Working Group noted that the current health expenditure indicator is relatively weak in its ability to proxy a government's commitment to health. Thus, the Working Group determined that the top priority for additional investment in data quality and analysis is an input indicator that measures national expenditures on health. Despite the weaknesses of the current data, the Working Group found that the share of government health expenditures on public health functions and services has the potential to fill a key gap in measuring commitment to health since it proxies the priority that the government places on health as a core public function. The Working Group recommends the MCC improve its health expenditure indicator accordingly.

In addition to the top choices above, the Working Group also identified several "runners up" that are at least as satisfactory from a conceptual perspective and would benefit from improvements in data quality (listed in no particular order):

  • Under-five mortality: indicative of government commitment to perinatal, infant and child health
  • Percentage of children under five with low height for age (stunting): indicator of chronic malnourishment, reflecting the government's attention to a fundamental risk factor for poor health and cognitive development
  • Births attended by skilled health personnel: indicative of effective policies in human health resources and access to obstetric care
  • Contraceptive prevalence rate: indicator of a range of appropriate policies that contribute to better pre-conceptional planning, pregnancy and infant health
  • Unmet need for family planning: indicator of access to family planning, a service that is directly related to the health and welfare of women and children
  • Sustainable access to an improved water source: indicator of government's attention to development of essential public infrastructure necessary for major health improvements

10. "MCC Effect" Explored
This year has seen a lot of press about the "MCC effect"--a term that, according to the MCC, has been coined to describe improvements in policy performance in countries that are either seeking to become eligible for MCC assistance, or have already been selected as eligible and are continuing the reform process. MCC's February newsletter lists a variety of examples.

Doug Johnson and Tristan Zajonc of Harvard agree, in their important new paper on the MCC's incentive effect on good governance. It's well worth the read:

"Even though the MCC is still in its infancy, we find substantial evidence that countries respond to MCC incentives by improving their indicators. Controlling for general time trends, potential recipients of MCC funds improve 25 percent more indicators after the MCC was created than before it. While still to early to make a final assessment, a range of specifications yield similar results. We do not find any corresponding increase in growth rates."

Randall Wood, a Program Officer at MCC, also agrees (no surprise) in his article, "Incentives and Capacity at the MCA" in the 2006 edition of SAIS's Perspectives magazine:

"Success stories like these show the MCA has indeed left its mark on the world even before substantial dollar amounts have been disbursed. The incentive effect--created by selecting only countries that have adopted and are adhering to good policies--has shown more results so far than the projects themselves; this is exactly what MCC was designed to do in the short and medium term. The longer-term success of MCC will be seen in the results of MCC-funded projects, an improvement in host country capacity, and growing familiarity with a new development paradigm."

A similar "MCC effect" may be seen for data source agencies who strive to improve their indicators though increased coverage, updated methodology, or more frequent updates. The various modifications in the FY 2007 eligibility criteria and methodology--in particular, the change from self-reported data in primary education and health spending to UNESCO and WHO respectively--and other improved data--notably, the IFC's Cost and Time to Start a Business (see item 1) --may well be a case of an "MCC effect." What some perceive as a rather blunt instrument, the MCC's use of an indicator for eligibility decision-making appears to be creating an incentive not only for countries to adopt targeted reforms, but also for source agencies to improve; this is an important contribution by the MCC to measuring development impact well beyond its own programs.

Says the IFC in its 2007 Doing Business Report: "In 2004 the United States' Millennium Challenge Account also introduced conditions for grant eligibility based on performance in the time and cost of business start-up. Since then 13 countries have started reforms aimed at meeting the criteria. Burkina Faso, El Salvador, Georgia and Madagascar have already met them. The lesson: what gets measured gets done."