The Millennium Challenge Account

The Bush administration is proposing to increase our foreign aid budget by 50 percent over the next five years. A new bureaucracy, the Millennium Challenge Corporation, would be created. Here is a summary from Slate.com:

In response to U.S. government development-assistance directive drift and to the Republican perception that aid has been hijacked by touchy-feely liberals, in March 2002 the Bush administration proposed the creation of the Millennium Challenge Account, which would be distributed via the Millennium Challenge Corp. In contrast to USAID, which administers funds to developing countries of pretty much every stripe and inclination, MCA moneys would be allocated only to those nations judged to be most committed to promoting economic freedom, governing fairly, and investing in education and health—based on scores in 16 quantitative areas (such as government effectiveness, primary education completion rate, inflation, etc.) using data collected by the World Bank, the International Monetary Fund, and other third parties. In order to qualify for MCA funds, a country must score above the median of all candidate nations in half the individual criteria in each of the three broad categories, and above the median in a corruption indicator—unless, of course, it is given a bye by the administration.

Under the current foreign aid regime, the U.S. government, often through USAID, crafts developmental priorities and projects, usually in conjunction with local governments, and oversees their implementation through mostly American contracting organizations. One of the key innovations of the MCA will be to give recipient governments a larger role in designing development programs and make them accountable for achieving results.

I remain to be convinced that this is a good idea. The countries that are truly reforming need foreign aid the least. The plan works best if you think that politicians want to push more reforms, but lack the cash to pay off special interests. The plan also works if you think that we can bribe politicians to reform. The plan works worst if you think that foreign aid leads to corruption and inferior policy. In that case we are penalizing the success stories and pushing them in the wrong direction. Of course, the very push for reforming foreign aid implies there is some truth to the latter possibility.

The real motive might be to bypass multilateral institutions and use foreign aid to reward potential allies in our foreign policy struggles. It is then Machiavellian to market this as an aid program.

If we wish to reform foreign aid, have we considered the cost-effectiveness of the alternative strategy of simply dropping dollar bills from a helicopter? No, this is not a purely facetious suggestion. After all, the Bush people tell us that we can spend our money more effectively than the government can for us. Given the lower quality of government in poor countries, we might expect private spending to be a better option there as well.

If we are going to have criteria for aid allocation, perhaps we should try to predict future growth potential, rather than looking at past reforms. Societies that are starting new investments in health care, education, and intermediate social institutions might be the promising recipients of aid dollars. If you know of any good studies on what predicts future (not current) growth, in the Granger-causal sense, please let me know.

The Slate article also notes the following:

...annual U.S. private foreign aid—via foundations, private voluntary organizations, corporate charity, religious organizations, and, most important, remittances sent home by emigrants and their descendants in the United States—amounted to roughly $35 billion in 2000, or more than three and a half times the aid handed out by the U.S. government. Private aid, like private enterprise, tends to be more focused on the bottom line of success—so the chances are better that (unlike, all too often, development funding from governments) a delivery mechanism or program that isn't getting the job done will be replaced, pronto.

Here is a link to the relevant research on private foreign aid.