October 2003

Views expressed are those of the authors, not necessarily of the AFSC.

Reforming Foreign Assistance

Francis Adams is an associate professor of political science and the associate director of the Graduate Program in International Studies at Old Dominion University in Norfolk, Virginia.

President George W. Bush has recently proposed increasing United States foreign assistance to developing countries. The centerpiece of the president's proposal, currently under consideration in Congress, is the establishment of a "Millennium Challenge Account" (MCA). The president is calling for annual appropriations to this account of $5 billion by fiscal year 2006, with no corresponding reductions in other forms of assistance. Should Congress fully fund this proposal we would see a fifty percent increase in total foreign assistance within three years.

President Bush proclaims the MCA a "new compact for development." The allocation of grants from this account would be contingent on the performance of recipient governments in key policy areas. As the president stated when the initiative was first unveiled, "greater contributions from developed nations must be linked to greater responsibility from developing nations." For this reason, Andrew Natsios, administrator of the United States Agency for International Development (USAID), has hailed the MCA as "the most sweeping development in foreign aid since the Marshall Plan."

Under the proposal, MCA funds would be made available to countries that "govern justly, invest in the well-being of their people, and encourage economic freedom." "Governing justly" would be measured in terms of civil liberties, the rule of law, and efforts to control corruption; "investing in people" would emphasize the provision of public primary education and basic health care; and "encouraging economic freedom" would stress reducing budget deficits, controlling inflation, maintaining open markets, ensuring an "appropriate" regulatory environment, and demonstrating strong support for private enterprise.

A fairly complex procedure would be employed to determine which countries are eligible for MCA funds. A country would need to score above the median for all countries with similar income levels on at least half of the indicators in each of the three policy areas, (except for inflation, which must be under 20 percent annually). One indicator--controlling corruption--is given special emphasis. A country must score above the median on this single measure or be disqualified from MCA funding regardless of performance on the other indicators. During the Account's first two years, MCA funds would be limited to countries with per capita incomes below $1435. Beginning in fiscal year 2006, countries with per capita incomes up to $2975 would be eligible to apply for assistance.

President Bush has also proposed creating a new government entity--the Millennium Challenge Corporation (MCC)--to oversee the MCA. The corporation would be supervised by a board of directors made up of cabinet members and chaired by the Secretary of State. A chief executive officer, nominated by the president and confirmed by the Senate, would be responsible for managing the account and supervising a staff of about 100 foreign aid officials drawn from various governmental and non-governmental agencies.

Countries deemed eligible for MCA funds would be invited to submit program and project proposals directly to the Millennium Challenge Corporation. Grants would then be allocated on the basis of the development priorities, investment needs, and growth potential of each country. The administration hopes these funds would be leveraged with support from other private, bilateral, and multilateral donors. Recipient governments would be required to sign multi-year contracts containing specific performance benchmarks for carrying out the program or project. The MCC would closely monitor performance. Should a country fail to meet the agreed-upon benchmarks the contract would be declared void and funding terminated.

First the good news

Although there is good reason for skepticism regarding the Bush administration's policies in the developing world, some elements of the MCA proposal are actually worthwhile. Democratic governance is an important prerequisite for equitable and sustainable development. In fact, by failing to take this into account in the past, the US frequently supported authoritarian governments that benefited from the existing order and resisted change. By strengthening these elites, foreign assistance simply reinforced structural inequalities; the amount of aid that actually reached intended beneficiaries was limited. Aid should be contingent on recipient governments' willingness to take concrete steps toward more representative and accountable political systems. The same can be said for meeting social needs. Governments should be evaluated on the extent to which they demonstrate a commitment to the health and education of their citizens.

The provisions built into the MCA to monitor and evaluate project implementation are also important. Again, effective monitoring and evaluation have been neglected in the past. Grants and loans have been allocated with little follow-up to determine how the money was spent or what was actually accomplished. This is a sure recipe for corruption and project failure. Financial oversight and accountability mechanisms should be included in our foreign aid programs.

The MCA would also be internally driven, with participating countries responsible for formulating grant applications. This is preferable to programs and projects designed in Washington which may or may not correspond to local conditions or pressing needs. There is at least a greater potential that proposals would reflect the national development strategies of recipient countries.

Lastly, establishing the MCC as a semi-autonomous entity outside the State Department could prove beneficial. Our regular foreign aid programs are largely driven by strategic and economic interests. With greater institutional autonomy, the MCA might be shielded from these broader foreign policy pressures. The Inter-American Foundation has functioned fairly effectively under this type of arrangement. Of course, with a board of directors made up of cabinet members and chaired by the Secretary of State, the actual degree of autonomy and policy independence might be quite limited.

But check out the fine print

There are other elements of the president's proposal that could be challenged. Although te MCA is championed as a dramatic increase in foreign assistance, it is important to recognize that the share of the federal budget devoted to aid is currently quite low. Even if the MCA was fully funded, total US aid would remain below the level of spending for any year between 1946 and 1995. Moreover, when foreign assistance is measured as a percentage of gross domestic product, the US ranks lowest among all donor nations. MCA funding will not move us up a single notch. It is also worth noting that although foreign aid would eventually reach about $15 billion per year, the Pentagon's budget is currently $340 billion and slated for steep increases.

The degree to which this proposal is really all that new could also be questioned. Since the mid-1970s congressional mandates have legally required USAID to deny assistance to governments that consistently violate the human rights of their own citizens, and since the early 1980s aid has frequently been conditioned on the adoption of neo-liberal economic reforms. Moreover, USAID has been funding a "Democracy Initiative" for about a decade and the International Anticorruption and Good Governance Act of 2000 stressed the importance of using foreign aid to combat corruption in the developing world. Conditioning assistance on the policy performance of recipient governments has been reflected in legal requirements for years, even if these requirements have not always been applied consistently.

There is also the possibility that the president's proposal would by-pass the poorest countries where needs are greatest. These countries, many of which are in sub-Saharan Africa, can be expected to score lower on some of the policy indicators, especially the provision of basic services. Requiring reductions in budget deficits and low levels of inflation would further limit a government's ability to meet social needs. Moreover, aggregate expenditures would not indicate the extent to which health and education services are equitably distributed within a country.

Requiring the adoption of neoliberal economic reforms, while certainly not surprising, is also a major shortcoming in the president's proposal. Two decades of experience has demonstrated that such reforms do little more than intensify inequalities in the developing world. Some groups clearly benefit from these reforms. Private investors have purchased public corporations at substantial discounts, large landowners have obtained wider markets for their agricultural exports, and local entrepreneurs have gained from closer association with foreign capital. At the same time, poor and working-class people have been adversely impacted by the removal of price controls on basic necessities and privatization of state-owned industries. The liberalization of foreign trade and investment regimes has also undermined the rural and urban poor. Small landowners have been displaced as the best lands became concentrated in the hands of local and foreign exporters. Small-scale artisans, without the capital, economies of scale, or advanced technology of transnational firms, have been forced into bankruptcy. Working conditions have frequently deteriorated as nations compete with one another to attract foreign investment.

Lastly, the president's proposal reflects a top-down rather than bottom-up approach to development. Although the proposal gives lip-service to the importance of participatory processes and civil society, there are no concrete mechanisms for ensuring that grassroots non-governmental organizations would be included in the preparation of proposals or implementation of projects.

What to do

Clearly, there are serious problems with the president's proposed Millennium Challenge Account. If the administration was genuinely committed to promoting broad-based development in Latin America, Africa, and Asia, the account would be structured to reduce rather than exacerbate economic inequalities in these regions. This would require going beyond the provision of public services to ensure that land and other productive assets are more fairly distributed.

The account would also be structured to fully incorporate nongovernmental organizations. Poor communities should not be simply the recipients of assistance but active participants in improving their own conditions. They must achieve a greater degree of power over their lives and the ability to manage the development process in their interests. Redirecting resources toward grassroots institutions holds the greatest promise for achieving genuine and sustainable development. In the absence of these changes, the Millennium Challenge Account holds little promise for achieving significant social and economic progress in the developing world.

For additional information on the Millennium Challenge Account and how to take action: INTERACTION, American Council for Voluntary International Action, 1717 Massachusetts Ave, NW, Suite 701, Washington, DC 20036 ; 202/667-8227 ; ia@interaction.org; www.interaction.org

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