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Washington – Today, the Trump administration included in its budget funding for a new Development Finance Institution (see page 129 here).
Below is a statement from Todd Moss, a senior fellow at the Center for Global Development, who has been a leading advocate for modernizing U.S. development finance over the past several years:
“Because of the changing global landscape, development finance – rather than aid – is the future. Many previously poor countries are richer today and are looking for partnerships with the United States to deliver jobs, roads, and electricity instead of just aid.
“That’s why it’s so important that the administration included a proposal in its budget to create a new development finance institution. Expanding our commitment to development finance promotes deep capital markets, our culture of entrepreneurship, and our belief in free markets while at the same time spurring economic growth in the developing world.
“The White House today has shown its willingness to build markets for American goods in fast-growing emerging markets, support private sector led growth in our strategic allies, and ensure that U.S. companies are competing in these markets with Chinese and European firms—all at less than zero cost to taxpayers. Now, it’s up to Congress to finish the job.”
Foreign aid advocates might be tempted to take heart from the budget deal just struck on Capitol Hill, which promises to create some breathing room for US foreign assistance as it boosts defense and non-defense spending. But it's important to take a step back and look at the larger picture. The fact is, the overall shift in the US fiscal position, driven primarily by last year's tax cuts and furthered by this spending agreement, suggests that developing countries will be net losers by orders of magnitude that swamp the entire US foreign assistance budget.
Congress and the Trump administration are now pursuing an aggressively expansionary fiscal policy at a time when such an approach seems nearly guaranteed to drive up interest rates. The ripple effects of this directional shift for the developing world will accelerate and exacerbate a trend toward higher costs of borrowing for developing countries and more limited access to capital markets.
These trends could capture large emerging market economies like Brazil, Mexico, and India. But they will also likely affect a new class of borrowers that includes much poorer countries like Rwanda and Ghana, who will be swept up and ultimately pushed out of bond markets as they find no takers for their debt.
According to World Bank statistics published this year, total external debt stock of low- and middle-income countries globally is currently nearly $7 trillion and represents a deteriorating position for these countries. Debt sustainability is becoming a problem for a growing number of developing countries, a risk identified most recently in the IMF's January update to its World Economic Outlook.
The risks are clear enough. Even an orderly and measured increase in the cost of borrowing for developing country governments and firms will squeeze government spending on poverty-reducing expenditures and slow investment in productive economic activities. And disorderly shocks and spikes in debt flows to these countries could destabilize their governments and set back economic progress over a longer period.
Of course, US fiscal policy is just one factor affecting developing country debt, but it increasingly appears to be an exacerbating factor. More spending in the United States on foreign aid is not the problem. Representing less than 1 percent of the budget, steady and even higher amounts of aid spending can easily be situated within a more responsible fiscal policy. But current US fiscal policy is being pursued with seeming indifference to its macroeconomic effects in the United States, let alone for the rest of the world.
I previously argued that the Obama administration's domestic response to the global financial crisis was its most important contribution to global development. In the same way, the Trump administration's fiscal policy may prove to be its most damaging contribution to the developing world.
As donors gather next week in Rome to pledge funds to the International Fund for Agriculture Development (IFAD), they may be wondering where the United States is. During a recent debate on the floor of the US House of Representatives, Congresswoman Maxine Waters raised the possibility that the Trump administration may not make a pledge to IFAD. If true, this would represent the loss of the fund’s largest donor and could jeopardize funding from other donors this year. Given the generally high marks this independent fund earns for development effectiveness, the uncertainty around a US pledge is troubling.
In this “America First” moment, it’s worth asking when it comes to IFAD, what’s in it for the United States and what will be lost if the United States drops out?
IFAD is the only multilateral institution dedicated exclusively to eradicating poverty and hunger in rural areas of developing countries. It was established in 1977 as one of the major outcomes of the 1974 World Food Conference, which was organized in response to the food crises of the early 1970s. To date it has granted or lent about US$12.9 billion for over 1,000 agriculture and rural development programs in 124 different countries.
The need for this support is clear. According to the 2017 State of Food Security and Nutrition in the World report, for the first time since 2003 the number of chronically undernourished people in the world has increased, up to 815 million from 777 million in 2015. And the Food and Agriculture Organization estimates that keeping pace with population growth in the developing world will require a 50 percent increase in the production of food and other agricultural products between 2012 and mid-century.
Because most of IFAD’s financing is provided at highly concessional rates that low-income countries can afford, its capital must be periodically replenished in order to prevent a drop in lending capacity. Next week, the fund’s 176 members will wrap up discussions on the parameters for the eleventh such replenishment and the fund’s donors will make their pledges.
Reflecting its economic status and long-standing leadership role in the multilateral system, the United States has traditionally been the largest single contributor to IFAD replenishments. Its US$90 million pledge to the Tenth Replenishment of IFAD’s resources (2016-2018) represented 8.7 percent of the total. While significant, this share is much smaller than is the case for other international funding bodies, such as the Global Fund (33 percent) or the World Bank’s International Development Association (17 percent). Moreover, this US$90 million pledge helps leverage financing that enables IFAD to support a $7 billion program of work, representing a remarkable “leverage” ratio of almost 80 to 1.
IFAD has had a practice of complementing US bilateral assistance programs, thus magnifying the impact of USAID’s work. For example, in northern Ghana, USAID and IFAD have worked together to improve the production and distribution of maize, soya, and sorghum by smallholder farmers. IFAD, USAID, and the US Department of Agriculture have also worked together on agricultural research and pest eradication, including the highly successful eradication of the screwworm in North Africa.
Whatever reason US officials might decide to withhold a pledge from IFAD, it can’t be due to the fund’s effectiveness. In a joint CGD-Brookings assessment, IFAD outscored US bilateral assistance on all dimensions. And another recent independent assessment noted that IFAD has sound fiduciary policies and practices and is fully committed to a results agenda.
When it comes to a US pledge, the good news may be that congressional support for the fund has been very strong on a bipartisan basis over many years. Even as Congress routinely cut Bush and Obama administration requests for funding to the World Bank and other regional development banks, congressional funding for IFAD was routinely protected. More recently, the US government’s global hunger and food security approach embodied in the bipartisan Global Food Security Act (GFSA) of 2016 closely mirrors the fund’s mandate and strategic priorities. These forces could ultimately prevail upon a reluctant Trump administration to come back to the pledging table sometime this year.
But as all of IFAD’s donors meet next week, it will be important for IFAD’s allies in Congress and elsewhere to make clear that US support for the fund remains strong and any lack of pledge at the moment is a temporary problem.
One of the biggest questions donors grapple with is how to balance implementing specific projects with building local capacity to execute similar programming in the future. Indeed, this question is central to the conversation—now active at USAID—about how donors can “work themselves out of a job.” One good example of how this can look comes from the Millennium Challenge Corporation’s (MCC) 2005-2010 partnership with Honduras. In this story, a key part of MCC’s legacy is not about what the agency funded but how it funded it. Through its commitment to country-led implementation, MCC helped set the stage for the government of Honduras to sustain and expand upon the structures and processes put in place to manage the MCC compact. The result: a new—and wholly Honduran—government unit that, over the last decade or so, has built a reputation for sound program management and a solid track record of efficient implementation.
At the origin: MCC’s commitment to country ownership
The idea that country ownership is critical for successful, lasting development programs is a central tenet of MCC’s model. A key way the agency puts this into practice is by giving the partner country the lead role in implementing the agency’s large-scale, five-year grant programs known as compacts. To do so, the partner country sets up and staffs an accountable entity called a Millennium Challenge Account (MCA)—usually as a separate government unit—to manage all aspects of the compact, including coordination with government ministries, procurement, contract management, maintenance of project timelines, and monitoring results. The MCA is overseen by a local board of directors with membership from government ministries, the private sector, and civil society. While MCAs usually wind down or dissolve at the end of a compact, for MCA-Honduras (MCA-H), implementing the compact was just the beginning.*
Expansion to manage other funds
Since the compact concluded in 2010, the government of Honduras has transformed MCA-H into a permanent government structure and expanded it to be the primary platform for managing donor funds in the areas of infrastructure, rural development, and food security. Rebranded as INVEST-Honduras in 2014, the unit has managed over $1 billion in funding from the government of Honduras and donors including the Central American Bank for Economic Integration (CABEI), the Inter-American Development Bank, the World Bank, and USAID.
As part of USAID’s own pledge to increase local partnerships, including government-to-government partnerships (G2G), USAID/Honduras had its eye on INVEST-Honduras, which it had watched develop through the MCC compact. USAID’s own standard pre-G2G procedure risk assessment tool reaffirmed INVEST-Honduras’ reputation for sound program management and relatively low risk. Thus, in 2014, the mission began funding a nutrition, watershed, and agricultural development program through INVEST-Honduras. Still ongoing, the program has expanded from its original $24 million to $60 million, and USAID points to additional benefits of directly funding INVEST-Honduras. Channeling money in this way has leveraged substantial cash contributions from the government of Honduras and better enabled the government to adopt the program as its own and build upon USAID interventions with other sources of funding.
On the front lines against corruption
Late last year, INVEST-Honduras was appointed by the president to chair a commission to liquidate and restructure the government’s road maintenance fund (Fondo Vial) in response to allegations of widespread dysfunction and corruption, including linkages with criminal networks. As of December, INVEST-Honduras is now executing all road maintenance functions, and is empowered to suspend personnel and revoke or renegotiate contracts with irregularities. The expectation is that such a move will close opportunities for corruption present in the previous model and increase the efficiency of contract execution.
Longevity and stability
INVEST-Honduras/MCA-H is now 13 years old. It has survived intact—with the same structure and largely the same staff—through five different governments. A number of factors seem to have contributed to its endurance, including competitive compensation and contracts that give donors a say over changes to key personnel, as well as a broad recognition that what the government was able to implement through the unit is worth preserving.
While MCC had a key role in INVEST-Honduras’ origin story, and other donors—including USAID—deserve credit for supporting its continuation, like all good country ownership stories this one ultimately owes its success to the local actor—in this case, the government of Honduras. And that’s how it should be. At the end of the day, it’s important to recognize that donor funds—in and of themselves—will not “transform” a developing country. The best hope is that a donor seeds something that local actors sustain and build upon. So make no mistake, the credit here goes to the government of Honduras. But let’s give MCC a quiet nod, too.
*While it is not the norm for partner country governments to preserve MCA structures post-compact, Honduras is not the only example. MCAs have also persisted post-compact in Lesotho, Tanzania, Morocco, Burkina Faso, and Ghana.
This week, the Millennium Challenge Corporation (MCC) edged one step closer to securing new authorities that would better position the agency to undertake regional programming. On Wednesday, the House approved the AGOA and MCA Modernization Act (H.R. 3445), sponsored by House Foreign Affairs Committee Chairman Ed Royce (R-CA), which would authorize MCC to pursue concurrent compacts with a single country—allowing for one with the traditional, bilateral focus and one that is regional in nature. House passage tees up the bill for action in the Senate, where the Foreign Relations Committee greenlit a companion measure in October.
Similar provisions were included in fully five bills in the 114th Congress, but none made it over the finish line. Hopefully 2018 will be the year.
Why should MCC focus regionally?
MCC’s singular mission is to reduce poverty through economic growth—and important constraints to growth can be cross-border in nature. MCC also works in regions—like sub-Saharan Africa—that contain many small economies and fragmented markets. In such contexts, some of the highest returns come from facilitating regional connections.
Because MCC can only form bilateral agreements, the agency hasn’t been able to exploit potentially high-return regional opportunities, even though a number of MCC projects in sectors like infrastructure and energy have an inherent regional component. For instance, in a number of early compacts—Tanzania, Honduras, and Nicaragua—MCC rehabilitated roads up to a national border and then stopped.
In recent years, MCC has done more to incorporate regional considerations into its bilateral compact development processes, but its ability to address key regional constraints to growth remains limited.
Why is concurrent compact authority important?
Currently, MCC can have just one compact at a time per eligible country. So even where MCC partner countries are adjacent to one another—and have cross-border issues that hamper greater economic activity—the agency hasn’t been able to coordinate programming among them effectively since countries are rarely at the same stage of eligibility or program design at the same time. Consider West Africa. The map below suggests there may be some prospects for regional integration. But because programs began development at different times, the agency was unable to build in a regional lens from the outset.
Current MCC partner countries in West Africa with the year compact development began
With concurrent compact authority, MCC could pursue a regionally focused investment while still advancing separate bilateral programs with one or more of the participating countries on their own timelines.
If MCC does receive authority to pursue concurrent compacts, how should the agency approach regional engagement?
Regional programs are much more complex than bilateral programs, often take longer, and can carry more risk. There will be operational challenges as well, in terms of figuring out how to define regions, how to deal with suspension or termination of individual parties, how to design a multiparty implementation unit, and how to structure incentives across multiple parties when costs and gains are unlikely to be equally shared. These challenges are not insurmountable and should not preclude MCC from the opportunity to expand its impact and generate greater economic returns. In fact, as CGD’s Nancy Birdsall pointed out, MCC has some advantages over other funders of large, cross-border investments. What the list of challenges does suggest is that, if given the opportunity to pursue concurrent compacts, MCC should reiterate its pledge to move slowly and cautiously (e.g., starting with an initial pilot) and reaffirm its long-held commitment to measuring results and learning from the process.
Even before he took office, USAID Administrator Mark Green made clear his vision that the objective of foreign assistance “should be ending its need to exist.” While his predecessors espoused similarconvictions, Administrator Green’s pledge to make “working itself out of a job” central to USAID’s approach has focused renewed attention on the question of how to responsibly and sustainably transition countries away from traditional, grant-based development assistance.
In recent months, USAID has been working diligently to craft its approach to “strategic transitions,” framing the principles it will follow, the benchmarks that will help inform transition decisions, and the programs and tools it can bring to bear. This Thursday, in a public discussion with the agency’s Advisory Committee on Voluntary Foreign Aid (ACVFA), USAID will outline its initial thinking about strategic transitions.*
In formulating its approach to strategic transitions, USAID should draw on the following 10 lessons that emerge from its own history and that of other bilateral donors:
Define transition goals, while recognizing broader US foreign policy objectives. Country transition plans should include both the development results and policy objectives USAID hopes to sustain as well as the actions required to achieve them, while taking into account the nature of the bilateral relationship.
Consider options short of complete aid exit. While complete withdrawal may be prudent in some circumstances, USAID should have leeway to pursue other options—such as approaching transition on a sector-by-sector basis, maintaining a development representative in country to support limited programming, or funding programs from Washington or a regional mission.
Recognize that coordination is crucial for effective transition planning. Close collaboration between USAID Washington and the field mission, as well as with other US government agencies, Congress, partner country stakeholders, implementing partners, and other bilateral and multilateral donors, is critical for transition success.
Assess and mitigate risks to sustaining development results (i.e., know who will fill the vacuum). USAID should protect the value of its past investments and seek to sustain its results by collaboratively identifying priority areas to be advanced by local actors (or other donors) and considering how to prepare the designated actors to take on new managerial or financial responsibilities.
Prioritize evaluation and costing of assistance activities that will be wound down. Critical to ensuring USAID-supported development results are sustained is understanding what (and whether) results have been achieved; costing exercises are similarly important for determining the appropriate actors—and the capacity of those actors—to take on additional obligations.
Transparently monitor progress on the transition plan. Monitoring progress toward the agency’s goals of ensuring sustained results can help USAID understand whether a transition approach is on track, and, if not, explore opportunities to adjust plans.
Ensure sufficient time for the above steps to occur. Sufficient time—at least 3-5 years—is necessary to meaningfully implement good transition practices; in contrast, overly compressed timelines can compromise US interests by hurting bilateral relations, undermining past development results, and/or leaving a void for competing powers to exploit.
Balance clarity and flexibility in the transition strategy. While it is important for USAID to define and clearly communicate its objectives, timeline, plans, etc., there should be enough flexibility to accommodate new information (e.g., from consultations) and contextual shifts (e.g., natural disasters, economic shocks) that emerge during the transition process.
Plan for mission staffing adjustments as part of the transition. USAID should recognize that transitions may require specific managerial skills and expertise that may not already exist within all missions; in addition, any staff downsizing must be sensitive to the need to preserve important relationships throughout the transition and support local staff in moving to new employment.
Learn and capture lessons. USAID should expand knowledge around common challenges and pitfalls by building into each transition process opportunities for real-time learning through experience sharing, as well as formal ex-post evaluation.
The pros and cons of using quantitative benchmarks to identify countries for transition—and an idea for how to do it
USAID has signaled interest in using quantitative benchmarks to evaluate a country’s readiness for transition. Using quantitative metrics ensures evidence is brought to bear on an important determination and can lend greater transparency, credibility, and accountability to the process. However, quantitative indicators will never provide a comprehensive picture of a country’s transition readiness, nor will they easily quantify broader US foreign policy and national security interests. Furthermore, data often carry some imprecision and are reported with a time lag. For these and other reasons, it is important that USAID not adopt a rigid or overly prescriptive interpretation of the quantitative criteria it develops.
We recommend a two-stage assessment for determining which countries might be ready for transition. The first stage would employ quantitative indicators to measure factors such as country need, fragility, good governance, business and economic environment, and financing capacity. The set of countries that show high performance across these measures would be analyzed further in the second-stage analysis that would employ both quantitative and qualitative information to assess whether national-level performance masks important subnational, gender-based, or other disparities, as well as a wider range of policy, institutional, and capacity issues most relevant to the sectors USAID funds.
Defining US engagement through the transition process and beyond
As USAID seeks to define a path for sustained partnership with transitioning countries, the agency should explore a full range of tools, some of which go beyond traditional, grant-based assistance.
The avenues of engagement that USAID pursues and the legacy structures it seeks to put in place will vary by country, depending on the nature of the agency’s existing investments, capacity and financing gaps in the partner country, the priorities of the partner country government, and the character of the broader bilateral relationship, among other things.
*Sarah Rose participated in an ACVFA working group focused on strategic transitions.
This week, the White House unveiled the first National Security Strategy of the Trump administration. As always, we were eager to see how the strategy considered the role of development. Presidents George W. Bush and Barack Obama famously elevated development, recognizing its importance alongside military might and smart diplomacy in promoting national security. We don’t see the same rhetorical treatment here, but the new strategy includes plenty of development-related content. While there’s a lot to unpack in the 68-page document, here are few things that caught our eye.
A Real Chance at 21st Century Development Finance
With two explicit references in the new strategy to the importance of modernized US development finance tools to foster stability and prosperity around the world, it’s almost hard to believe that earlier this year we worried that the administration would attempt to dismantle the United States’ development finance agency. But even before he was sworn in, OPIC’s President and CEO Ray Washburne championed a growth agenda for the agency. The strategy also rightly points out that more and more developing countries are seeking investments and financing—frequently to pursue infrastructure projects—suggesting an important opening for development finance, which works to crowd in private sector investment in frontier markets. CGD experts have longurged the United States to strengthen its development finance tools—giving OPIC resources and authorities more in line with those of its European counterparts. With strong support already building in Congress, the strategy is further proof that a self-sustaining, full-service US Development Finance Corporation may finally be on the horizon.
Deliberately Targeting US Development Assistance
The new strategy echoes USAID Administrator Mark Green’s repeated calls to make the chief goal of US development assistance ending its need to exist. And it invokes the idea of moving away from heavy grant-based assistance toward approaches that draw upon the resources of the private sector, consistent with USAID’s pursuit of “strategic transitions.” Given the changing global landscape, if the United States is serious about promoting development—or “advancing American influence” as the strategy suggests—it will need to look to avenues of engagement that extend beyond aid, employ innovative approaches, and encourage country ownership. There are good reasons to transition the US model of engagement in select countries from one characterized by a reliance on grant-based aid to one that better matches a partner country’s needs. But as recent CGD analysis uncovered, if that process is driven primarily by budget or political pressures, it is unlikely to succeed.
Charting a Direction for US Multilateral Engagement
As early as page three, the strategy expresses some skepticism about the role of international institutions and other multilateral forums. It goes on to acknowledge an important role for US leadership in these institutions, noting the “competition for influence,” and even promises a continued leading role for the United States in the World Bank, the IMF, and other institutions. But we’ve already seen signs of retrenchment from this administration, which—as my colleague Scott Morris has pointed out—contrast starkly with China’s growing ambition. As a major shareholder, the United States can and should ask tough questions of the World Bank and other institutions, but the administration should also recognize the remarkable advantages of multilateral investments—particularly with respect to multilateral development banks, which have great leverage ratios, unique instruments, and impressive geographic and sectoral scope.
Demonizing Immigrants Rather than Leveraging Their Potential
We weren’t the only ones to notice the new strategy’s heavy emphasis on legal immigration to the United States—or the suggestion that much of that immigration threatens our national interests and security. Such blanket assertions just aren’t supported by the facts. The reality is starkly different, and markedly positive: the Organisation for Economic Co-operation and Development (OECD) has estimated that US immigrant households pay over $8,000 per year more in taxes and social security contributions than they receive in social transfers. Meanwhile studies have shown that immigrants to the United States are less likely to commit crimes than native-born Americans or have no effect on the crime rate. And migration has a variety of knock-on benefits for development. If anything, the United States should seek to leverage migration for greater prosperity and stability abroad.
A Stark Disconnect with Proposed Resources
Finally, while this national security strategy does not shy away from highlighting threats and challenges, looming large are the deep cuts to international affairs spending included in the president’s FY2018 budget request. If the administration’s FY2019 request looks anything like last year’s, it will be difficult to imagine the United States truly being ready to tackle a global pandemic (a matter of when—not if), remain a leader in humanitarian response, provide meaningful assistance in fragile state contexts, or fulfill many of the strategy’s other bold promises.
Every December, MCC’s board of directors meets to select the set of countries eligible for MCC’s compact or threshold programs. And each year, before the board meeting, CGD’s US Development Policy Initiative publishes a discussion of the overarching issues expected to impact the decisions alongside its predictions for which countries will be selected. Here’s what to watch for at the upcoming MCC board meeting on December 19.
The Overarching Questions
How might the prospect of a historically low budget constrain decision-making?
Budget uncertainty is an ever-present feature of MCC’s eligibility decisions since—in recent years—the appropriations process has rarely been finalized until well after the December meeting. But while the current appropriations limbo is nothing new, this year MCC is looking at the potential for a budget lower than any the agency has ever seen. The Trump administration’s FY2018 budget request slashed international affairs spending, and though MCC was spared the severe cuts dealt to other development accounts, the request of $800 million—if enacted—would be the agency’s lowest-ever appropriation. It might not end up there. The House Appropriations bill provided the $800 million included in the president’s request, but the Senate came in at $905 million, level funding compared to FY2017.
With up to three compacts expected to be approved in FY2018 and up to four more in the pipeline for subsequent fiscal years, competition for funds will be tight. MCC cannot afford to select all 31 countries that pass the scorecard (nor would all be top choices for reasons of size and policy performance). As always, the board will have to prioritize. The average number of new first or second compact selections in a year is three. This year may see fewer.
How will the new board interpret MCC’s good governance mandate?
This will be the fourth board meeting under the Trump administration, but only the second with political appointees in four of the five public positions (no nominee has been named to lead MCC), and the first to deal with country eligibility. Of course, this isn’t unfamiliar territory for all the board members. USAID Administrator Mark Green served five years on the MCC board in one of the four slots reserved for private members. The two current private members are veterans too. But the two other private sector slots remain unfilled, giving the administration more weight than usual in the board’s decisions.
This year’s selection decisions will require the board to make judgments about one of the core precepts of MCC’s model—that policy performance matters. MCC bases its eligibility criteria on governance quality to reward countries taking responsibility for their own development, create incentives for reform, and (potentially) increase the effectiveness of MCC investments. The eligibility criteria are also intended to depoliticize eligibility decisions, in recognition that blended objectives—supporting geostrategic partners and promoting development—can sometimes muddle development results. In practice, US geopolitical interests have certainly influenced the direction of some eligibility decisions, but rarely—if ever—trumped policy performance. The question at this year’s meeting will be how the MCC board, under the Trump administration, weighs good governance in the spirit of MCC’s founding model against the importance of a bilateral relationship, a factor the agency’s model seeks to downplay.
This year, the board faces decisions about large and/or strategically important countries—for example, the Philippines (the decision to watch this year) and Bangladesh—that come with important concerns about civil liberties and human rights. On the flip side, the board will need to define the next stage of MCC’s relationship with several countries that are already engaged in a threshold program or compact development that are smaller and less strategically important—for example, Lesotho, Timor-Leste, and Togo.
The Trump administration has provided some insight into its broad views on the issues at the heart of these eligibility decisions. For instance, President Trump has been largely silent (and at one point congratulatory) about human rights concerns in the Philippines. And the FY2018 budget request’s gutting of foreign assistance, which included zeroing out development-focused aid for 37 countries, suggests limited appetite for spending scarce development dollars where US strategic and economic interests are weaker. But these clues are well outside the context of MCC, so how the board considers good governance versus bilateral importance for MCC eligibility is unclear.
A Brief Overview of How MCC’s Selection Process Works
Here are four key things to know. For more detail, see MCC’s official document or my short synopsis (section “How the Selection Process Works,” p. 2-4).
MCC’s country scorecards provide a snapshot of a country’s policy performance compared to other low- and lower-middle-income countries. To “pass” the scorecard, a country must meet performance standards on 10 of the 20 indicators, including the Control of Corruption indicator and one of the democracy indicators (Political Rights or Civil Liberties).
The scorecard is only the starting point. The board also considers supplemental information about the policy environment, as well as whether MCC could work effectively in a country, and takes into consideration how much money the agency has.
Once a country is selected as eligible for a compact, it must typically be reselected each year until the compact is approved (usually 2-3 years).
A country can be considered for a second compact if it is within 18 months of completing its current program. In decisions about subsequent compacts, MCC looks for improved scorecard performance and considers the quality of partnership during the first compact.
Countries that Pass MCC’s FY2018 Scorecard Criteria
Low IncomeLower Middle Income
Micronesia, Fed Sts.
São Tomé and Principe
MCC Eligibility Predictions for FY2018
Below are my predictions for FY2018 MCC eligibility. I don’t cover all 83 countries since around two-thirds of them have low enough scorecard performance to make them unlikely candidates. Instead I restrict my analysis to:
All countries that pass the scorecard criteria, except those not in the running for any kind of eligibility decision. These are Benin, Côte d’Ivoire, Georgia, Ghana, Liberia, Morocco, Nepal, and Niger, all of which are currently implementing compacts and are not within the timeframe for subsequent compact eligibility.
Countries that don’t pass the scorecard but for which a decision about continued eligibility is expected.
Countries that don’t pass the scorecard but come close enough to be considered for threshold eligibility.
Click on any country name to read a brief analysis and rationale for my prediction.
First compact eligibility, new selection
Timor-Leste has a long and complicated history with MCC. It was selected as eligible for a compact in FY2006 but never finalized an agreement for unstated reasons—likely related to political unrest as well as repeatedly failing the Control of Corruption indicator (due mostly to its move from the low-income group to the more competitive lower-middle-income group). Instead, as somewhat of a consolation, MCC moved Timor-Leste to the threshold eligibility in FY2009, and the country implemented a program that concluded in 2014.
Last year, Timor-Leste (once again classified as low income) passed the scorecard for the first time in a decade, and the board selected it for a second threshold program. Now that Timor-Leste passes handily for a second year in a row, the board could opt to move Timor-Leste up to compact eligibility.
It’s not a sure thing, though. First of all, Timor-Leste is small and remote, and it’s hard to tell if the new board will find it appealing to spotlight the tiny half-island nation, especially when there are few other prospective new compact countries to pick this year. Timor-Leste also has a large petroleum sovereign wealth fund, raising questions about the country’s need for grant funding. And on top of that, its per capita income puts it near the threshold separating the low-income category from the more competitive lower-middle-income category. Timor-Leste may well bump into the higher category again soon, and if it does, it will almost certainly fail the scorecard again.
That said, the board also likely recognizes that Timor-Leste is a very poor country, despite the oil wealth that has made it nominally middle income. Nearly half the population lives under $1.90 a day, and its median household income per capita is just $2—on par with countries like Benin, Niger, and Tanzania. Furthermore, a dip in oil prices and declining production has hit Timor-Leste hard and presents risks for future fiscal sustainability. After 12 years of a tumultuous partnership, this might be the year MCC restarts compact eligibility with Timor-Leste.
Second compact eligibility, new selection
Malawi passes the scorecard for the 11th year in a row. When the board meets next week, the country will be nine months out from completing its compact and could be considered for second compact eligibility. While it’s a possible choice, there are a couple of factors that may make the board think twice. First, the last year of compact implementation is often the most intensive, as countries push to complete the program before the five-year time clock runs out. MCC may prefer that Malawi focus its finite capacity on successful implementation, without the distractions that come with developing a new program. In addition, while Malawi has an excellent record of passing the scorecard, second compact eligibility demands a higher bar and the expectation that a country will demonstrate improved scorecard performance, especially in the areas of control of corruption and democratic rights. Here, the case for Malawi is harder to make. Its Control of Corruption score has declined some in recent years, on the heels of a major 2013 corruption scandal that led donors to withhold funds. While this isn’t a statistically significant decline, it is noteworthy that Malawi has dropped over 15 percentage points in rank in the last five years and is now hovering close to the pass/fail threshold. Subsequent scandals have unfolded since 2013, and efforts to investigate them have faced hurdles. Arrests of protestors and treason charges against opposition figures also merit attention, as do the current government’s trumped up charges against a former president. With few contenders for new first or second compacts this year, Malawi may be in the running, but it is not a clear-cut choice.
Zambia passes the scorecard for the 10th year in a row. Its current compact will end in November 2018, almost a full year from next week’s board meeting. While this puts it within the 18-month window for second compact consideration, it’s not an obvious choice this year. MCC may prefer not to distract from the final, intensive year of compact implementation with preparations for a new program. It can also be hard to fully gauge the quality of the partnership, one of the criteria for second compact eligibility, when there is still a (very busy) year to go. Not only that, Zambia may not meet the higher bar for improved scorecard performance. Its Political Rights indicator has shown substantial decline due to a restrictive environment for political opposition before the country’s 2016 general elections, and increased restrictions on freedom of expression and demonstration. Because there are few compact contenders this year, and because Zambia is within the window for second compact selection, it will probably be under serious consideration. However, it seems more likely that MCC will wait to reassess the political environment and the quality of compact implementation after the current compact concludes.
Threshold program, new selection
The Gambia (probably)
MCC picked the Gambia for compact eligibility back in FY2006, but suspended it less than a year later due to concerns about the policy environment. A decade later, MCC and the Gambia seems set for a do-over. This year, the only criteria that keep the Gambia from passing the scorecard is the democracy hurdle. And there is reason to believe this may soon change. The indicators reflect the events and conditions of 2016, a year that culminated in the then president—who had been in power for 22 years—refusing to accept the results of an opposition electoral victory. In January, he finally agreed to leave office, leading to the country’s first transfer of power by popular election. The party of the new president won a sweeping victory in the mid-2017 parliamentary elections, which could facilitate further reforms. With a failing scorecard, the Gambia isn’t a contender for a compact yet, but it could be an attractive country for a threshold program. MCC has a strong presence in West Africa, which it has long been eyeing for regional opportunities. The agency is likely interested in testing how a partnership with the newly democratic Gambia would go, while watching the policy trajectory of the new government.
For seven years running, Bangladesh has either passed (twice) or come very close to passing the scorecard, falling just short on the Control of Corruption indicator. However, MCC has always decided against compact or threshold eligibility for Bangladesh. Its inconsistent passing of the Control of Corruption indicator has made it a risky bet for compact eligibility. And more broadly, MCC undoubtedly has had a watchful eye on constraints to political rights, civil liberties, and press freedom in Bangladesh. There have been no major advances in these areas that would suggest this year presents a particular opportunity for eligibility. Just the opposite, in fact, with a government crackdown on labor protestors earlier this year and reports that press freedom is increasingly under threat. General elections are also due at the end of next year, and Bangladesh has a history of political violence around its electoral cycles.
That said, MCC has been thinking about possible regional approaches in South Asia, and Bangladesh is a major player in the region. The US government may also be particularly interested in supporting Bangladesh at this time, given its role on the front lines of the Rohingya crisis, having received over a million refugees from neighboring Myanmar.
The board is almost certainly giving Bangladesh some serious thought this year. Though its governance issues raise questions about its fit with MCC’s good governance mandate, the board could consider the country for threshold program eligibility. A threshold program would allow work to begin on initial phases of a partnership, but afford MCC time to watch how next year’s elections and the broader human rights context unfold. One important consideration, however, is that threshold programs are small (around $20 million over three or so years), and therefore may not get a lot of attention in Bangladesh, which receives over $4 billion in foreign aid each year. So even compact consideration may not be entirely off the table. Either way, Bangladesh isn’t a highly likely pick. But it shouldn’t be ruled out.
First/second compact eligibility, reselection to continue compact development
Burkina Faso (probably)
Burkina Faso was initially selected as eligible for a second compact last year. It passes the scorecard for the seventh year in a row and has been working with MCC on a constraints to growth analysis that will inform the focus of the compact.
Lesotho—which holds the distinction of being the only current candidate country to pass the scorecard every single year since MCC’s inception—was first selected for second compact eligibility in FY2014. It’s had a bit of a rough road since then. For the last two years, the board deferred a reselection decision due to uncertainty surrounding how the country would address serious concerns about the behavior of the military, including allegations that the armed forces had been active in stifling the opposition and those loyal to the prior regime. Just before last year’s selection-focused board meeting, there were early signs of progress in Lesotho, and the board decided to see how well they would be implemented over the coming year. Instability still persists in the mountain kingdom, but the government of Lesotho has taken steps that demonstrate the seriousness with which it is taking the Southern African Development Community (SADC)’s recommendations to address its challenges. It has launched a reform process, and President Thabane recently requested a SADC stabilizing force to provide protection to the government as it implements the regional body’s recommendations to arrest and try military officers and tackle security sector reforms. The board will probably take a positive view of these recent steps and give Lesotho the green light to proceed with compact development.
Since it was first selected for a second compact in FY2015, annual eligibility determinations for Mongolia have been anything but straightforward. In FY2016, Mongolia’s per capita income briefly rose above the ceiling for MCC candidacy, taking it out of the pool of country scorecards. Since it wasn’t a candidate country, the board couldn’t reselect it; however, they did reaffirm the agency’s commitment to continuing to develop a second compact with Mongolia. Last year, Mongolia was back in the candidate pool, but failed the Control of Corruption hurdle. The board wisely reselected it anyway, recognizing that the failure was not indicative of an actual policy decline. There are no such hitches for Mongolia this year, which passes the scorecard once again.
The Philippines (hard to predict, but unlikely)
As I explain in more detail here, the Philippines decision is the one to watch this year. The Philippines, an important strategic ally for the United States, has had a long partnership with MCC. It had a threshold program from 2006 to 2009, a compact from 2011 to 2016, and was selected as eligible for a second compact in FY2015. But since the inauguration of Filipino president Rodrigo Duterte in mid-2016, some serious questions have emerged about whether the Philippines continues to meet MCC’s good governance criteria. In particular, there are concerns about Duterte’s support for the extrajudicial killings of thousands of people suspected of involvement in illicit drug activity. This issue—in addition to the Filipino president’s inflammatory anti-American (and specifically anti-Obama) rhetoric—led the board to defer a decision about whether to reselect the Philippines last year. A vote up or down would have constituted a major foreign policy decision just weeks before the new Trump administration would take office. Over the past year, Presidents Trump and Duterte have developed an amicable relationship. Trump recently returned from a successful trip to the Philippines, and, over the course of his first year in office, he has been largely silent about (or arguably supportive of) the extrajudicial killings.
Another factor the board will have to weigh is that the Philippines doesn’t pass the scorecard this year, failing the critical Control of Corruption indicator. While this might appear important, it should really be less of a concern than the actual, identified human rights issues described above. The decline in the Philippines’ score is slight (not remotely significant), and the country has long ranked near middle of the pack on this indicator, fluctuating above and below the passing threshold. Its failing score is not a signal that it has suddenly become more corrupt. It does, however, offer an “easy out,” giving the board a way to curtail the relationship with the Philippines without being explicit about the human rights concerns the Trump administration has chosen to downplay. While “easy,” it’s not the right rationale. Instead, the board should refer to MCC’s criteria that countries must meet a higher bar on the scorecard for a second compact. The downward movement on the Civil Liberties indicator (reflecting, in part, the drug-related killings) suggests the Philippines probably doesn’t clear that hurdle.
The Philippines is a hard prediction to make. On the one hand, the US government is undoubtedly sensitive about its relationship with an important geostrategic ally whose current leadership has responded to US criticism by threatening American interests and edging closer to China. On the other hand, it’s hard to make the case that the Philippines meets MCC’s good governance standards for a second compact. I’m predicting that the board will ultimately vote not to reselect the Philippines this year. A different outcome would not be surprising. But it would be unfortunate for what it would say about how the current board interprets MCC’s good governance mandate.
Senegal was initially selected as eligible for a second compact in FY2016. It passes the scorecard for the 11th year in a row and has been working with MCC to develop a program in the energy sector.
Sri Lanka (probably)
Sri Lanka was selected for threshold program eligibility in FY2016 and then—before signing a threshold program—for compact eligibility last year. Since then, it’s been developing a compact on an accelerated timeline thanks to the constraints to growth analysis that it conducted as part of threshold program eligibility. The proposed programs will focus on regional transportation and access to land.
Tunisia was initially selected for a compact last year. It passes the scorecard for the second year in a row and has been working with MCC on an updated constraints to growth analysis that will inform the focus of the compact.
Countries that pass the scorecard but are unlikely to be selected
Bhutan, Comoros, Kiribati, Federated States of Micronesia, São Tomé and Principe, Solomon Islands, and Vanuatu
All have passed the scorecard in several prior years but have been passed over for eligibility, presumably because of their small size (all have populations under a million). Though MCC does not have an official minimum size requirement for compact eligibility, the board has demonstrated a preference against the selection of small countries.
Cabo Verde is also small (population 540,000), but, unlike the small countries listed above, it has had a long partnership with MCC, completing its second of two compacts in November this year. If the board were to select Cabo Verde again it would be for a third compact. MCC absolutely should be given the green light to pursue third compacts with select partners. However, because not all MCC stakeholders (including some members of Congress) buy into this idea wholeheartedly, it would be risky for MCC to pick tiny Cabo Verde as the vanguard of a potential new cohort of third compact partners.
India regularly passes the scorecard, but neither it nor MCC—not to mention many members of Congress—think a compact is an appropriate tool for the bilateral partnership. India is, after all, the world’s seventh-largest economy and a foreign aid provider, not to mention its over $300 billion in foreign exchange reserves. MCC and India have, however, discussed how they might collaborate on MCC’s programming in South Asia, including in Nepal and Sri Lanka.
Because Indonesia’s compact ends within 18 months, it could be considered for a second compact. It’s an unlikely choice, however. This is only the second year that Indonesia has passed the scorecard (the other time was in FY2009, the year it was selected for its first compact). This makes it a risky bet since it’s far from clear that it would continue to pass with any consistency in the future. In addition, the ability for an MCC compact to affect poverty reduction and growth is relatively limited in the world’s fourth biggest country and 16th largest economy, which gets trillions of dollars of foreign direct investment each year. That said, Indonesia is a strategic partner of the US government. If it continues to pass the scorecard for a few years, a more serious conversation about a second compact might arise in the future. But not this year.
Kosovo passes the scorecard for the second time this year. When it first passed, in FY2016, it was selected for compact eligibility. Last year, however, Kosovo was downgraded to threshold program eligibility due to a failing score on the Control of Corruption indicator. Though MCC cited Kosovo’s troublesome trajectory on the indicator as rationale for the shift, there was zero actual evidence of a real policy decline. The fact that it passes again this year (with its highest score since independence) makes MCC’s end-of-2016 professed dissatisfaction with Kosovo’s indicator performance appear, retrospectively, even more off base. Kosovo just signed a $49 million threshold program (the second largest in MCC history), however, so MCC probably won’t choose it for a compact again this year. But the Kosovo story amplifies the need for MCC to change its approach to the Control of Corruption indicator for reselection decisions.
Tanzania was selected for second compact eligibility in FY2013, but MCC suspended the partnership in 2016 based on the flawed and unrepresentative conduct of a 2015 election in Zanzibar, as well as moves by the government to stifle dissent and control information. There has been no appreciable improvement in these areas, so the board is unlikely to reselect Tanzania this year.
Togo passes the scorecard for the second year in a row. It was selected as eligible for a threshold program in FY2016 and is close to finalizing a program focused on policy reform in the information/communications technology and land sectors. However, at the board meeting in September, MCC flagged concerns with the political rights and civil liberties environment in Togo and indicated that it would not sign the threshold program agreement until there were clear signs of improvement. This suggests that Togo will not be moved up to compact eligibility this year.