Aid Breakthrough or Disaster?

The best foreign aid initiative by the U.S. government in the past 30 years could be headed toward disaster. But it’s not too late to save it

President George W. Bush unveiled in March his proposal to create a Millennium Challenge Account to direct an additional $5 billion per year of budget resources to promote economic development in poor countries. Since then, his administration has been working to design an institution that will be effective in rewarding countries committed to good governance, investing in health and education, and pursuing policies required for private enterprise to thrive.

Three critically important steps in the right direction appear to have been taken so far. One was a decision to focus on a small group of countries that are clearly committed to the three objectives mentioned above.

Limiting the recipients in this fashion is important because $5 billion a year is a drop in the bucket compared to the public-sector investment required to measurably affect global poverty over five to 10 years. Spreading this amount out among many more countries would make it harder to see the results and therefore harder to sustain the support of American taxpayers.

A second decision was to distribute the funds as grants. Given the debt servicing problems that have plagued developing countries since the mid-1970s, this is clearly the right form.

A third decision—revealed in a press briefing on Nov. 25—was to establish the new foreign-aid vehicle as an independent agency [the Millennium Challenge Corp.—MCC] rather than attaching it to the State Department or the Agency for International Development [AID].

Independence is probably essential to ensure the funds are allocated on the basis of development more than political criteria. Independence also offers the possibility of a fresh start without the heavy baggage or “barnacles” that encumber our ongoing foreign assistance programs.

Unfortunately, other steps that have leaked out of the policy laboratory seem likely to take the MCC down the road to perdition that has been the fate of dozens of such initiatives over the past three decades. For example, the MCC’s architects are apparently examining ways to coordinate MCC grants with other programs; leverage money from other sources; develop a participatory process for selecting specific projects to support; establish partnerships with private sector firms, foundations and local NGOs; and create a state-of-the-art monitoring process. Each of these is a step into the quagmire of past foreign aid failures.

Saving a good idea from this fate will depend on keeping the design simple. Really simple. Only three more steps are needed for the MCC to achieve its full potential for raising standards of living in developing countries:

Rewarding past results. An MCC that rewards results already achieved by countries will be more effective than an MCC that tries to buy future results. The United States, the World Bank and 100 other donors have been trying with increasing intensity over the past 10 years to buy results.

It cannot be done. It’s like pushing on a string. One reason is that money is fungible and most aid is simply financing the country’s least productive budget expenditures—military hardware for example. If we don’t like how a country is spending its last budget dollar, we should not be giving that country any aid. If we like what a country did in its last fiscal year, then we can get a lot of “bang for the buck” by simply giving a no-strings grant that will help the country go a bit further in its next fiscal year.

Ensuring continuity. Abruptly stopping and starting aid is one of the biggest reasons why so much as been wasted. Once we decide to extend MCC grants to a country, we should operate on a 5-year rolling basis. This means the country can count on getting the same amount in each of the next five years, give or take a little. Results would be reviewed annually and the amount would be pushed up, by 10 percent perhaps, if we saw progress in the last year from the year before. By the same logic, the amount would be cut more sharply if the country seemed to be slipping, perhaps by one-fifth of the baseline amount. The corporation would also of course retain the option of cutting more drastically in the face of a major adverse change [civil war], and would phase out U.S. support when it was no longer required.

A tiny bureaucracy. A $5 billion MCC structured in the fashion suggested could be administered by as few as 15 to 20 people. No sector specialists would be necessary. No project managers or contracting officers. In particular, there would be no need for auditors because the money would simply go into the government’s bank account to finance its budget. If the country’s budget is not transparent and if the country’s auditing of its own budget expenditures is inadequate, it should not be eligible for MCC financing.

Complicated is the kiss of death. Micromangement is resented. Tracking every penny will not guarantee results. The MCC is the right concept at the right time. But it will only end up a winner if it stays simple. Really simple.

Lex Rieffel is a nonresident guest scholar at the Brookings Institution.