The Millennium Challenge Account: Congressional Consideration of a New Foreign Aid Initiative

Publication Date: March 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

In a speech on March 14, 2002, at the Inter-American Development Bank, President Bush outlined a proposal for the United States to increase foreign economic assistance beginning in FY2004 so that by FY2006 American aid would be $5 billion higher than three years earlier. The new funds, which would supplement the roughly $16.3 billion economic aid budget for FY2003, would be placed in a separate fund -- Millennium Challenge Account (MCA) -- and be available on a competitive basis to a few countries that have demonstrated a commitment to sound development policies and where U.S. support is believed to have the best opportunities for achieving the intended results. These "best-performers" would be selected based on their records in three areas -- ruling justly, investing in people, and pursuing sound economic policies.

Development of a new foreign aid initiative by the Bush Administration was influenced by a number of factors, including the widely perceived poor track record of past aid programs, recent evidence that the existence of certain policies by aid recipients may be more important for success than the amount of resources invested, the war on terrorism, and the March 2002 U.N.-sponsored International Conference on Financing for Development in Monterrey, Mexico.

The MCA initiative is limited to countries with per capita incomes below $2,935, although in the first two years -- FY2004 and FY2005 -- only countries below the $1,415 level would compete for MCA resources. Participants will be selected based on a transparent evaluation of a country's performance on 16 economic and political indicators, divided into three clusters corresponding to the three policy areas of governance, economic policy, and investment in people. Eligible countries must score above the median on half of the indicators in each area. One indicator -- control of corruption -- is a pass/fail measure: a country must score above the median on this single measure or be excluded from further consideration.

The Administration proposed to create a new entity -- the Millennium Challenge Corporation (MCC) -- to manage the initiative. The MCC would be supervised by a Board of Directors chaired by the Secretary of State. Several other key issues, including the number of participating countries and monitoring mechanisms, have yet to be determined.

Congress plays a key role in the policy initiative by considering authorization and funding legislation, and confirming the head of the proposed MCC. A number of issues have been addressed in the congressional debate, including country eligibility criteria, performance indicators used to select participants, creation of the new MCC, and budget considerations. Congress approved legislation (Division D of P.L. 108-199) authorizing the new program and appropriating $994 million for the first year. The measure creates a Corporation, as proposed, but alters the composition and size of the Board of Directors. It further limits the extent to which lower-middle income countries in FY2006 and beyond can participate in the MCA so that more resources will be available for the poorest nations. The legislation creates a roughly 90-day period after the Corporation is established for consultation and public comment before selecting MCA participants for FY2004. It is expected that the Board will name the initial MCA eligible countries in May 2004.