When President Obama released his FY2013 request for the MCC, I expressed concern that this low number was only the opening salvo, subject to reduction in congressional mark-up. So it’s good to see the House recognize the importance of the MCC’s mission and model and fulfill the request.  Assuming the $898 million request for MCC is appropriated, FY2013 will be the third consecutive year that the MCC has been funded at $898 million.

Also worth noting, the House subcommittee included language on the MCC’s new income categories that define “low income” as the poorest 75 countries. These new definitions first passed in FY2012 but will have to be legislated on an annual basis.

There were just six months left in Mali’s MCA compact when the military coup occurred. One might assume the impact of a slightly early finish would be minimal. But the MCA compacts invest an enormous amount of energy setting up systems with the partner country in the early years and much of the final disbursements and construction takes place in the final months. Of the $460 million compact, the MCA had expended, but not yet paid or invoiced, $350 million as of December 2011. That means Mali has lost upwards of $100 million in MCA money and the anticipated benefits (most of which occur after a compact is finished) along with it.  The MCC will have to spend some of that money, instead, to extricate themselves from unfinished projects like the airport terminal construction site.

Mali’s coup is an unwelcome reminder of how quickly events can change even in well-governed developing countries and the huge impact political upheaval has on a country’s economy. The U.S. government is rightly pushing for a quick restoration of constitutional civilian rule in Mali. Democracy prevailed in Senegal  (whose MCA compact is underway) and Malawi (whose MCA compact is currently suspended). Let’s hope things turn around in Mali, too (I need to ask my colleague Todd Moss how his prescient draft novel about a coup in Mali and the diplomatic efforts to reverse it ends).

I love that the invite is addressed to me and the MCA Monitor Blog. Too bad Millennium Challenge Corporation (MCC) doesn’t use “sense of humor” as one of its new selection indicators for aid funding or Zimbabwe’s (er, Paramount’s?) scores might be looking a little better.

The MCA Monitor regrets it will be unable to attend due to a prior engagement.

What is PFG?

Partnership for Growth is an approach that embodies the principles of the Presidential Policy Directive on Global Development by trying to operationalize a whole-of-government approach. The administration selected four “emerging, emerging markets with skin in the game” as the initial PFG countries. After selection, each partner government and the USG undertook a joint constraints-to-growth analysis and developed joint country action plans to focus on the highest priority barriers to growth.  These plans will be implemented over a five-year period with rigorous monitoring and evaluation throughout PFG implementation.

What Makes PFG Different?

The Administration is championing the PFG model as a new way forward for USG development activities, but many of the hallmarks of PFG – a singular focus on economic growth, country ownership, rigorous M&E – are already established practice in agencies like the MCC and USAID.   Here’s what makes it (kind of) different:

• Interagency coordination. As Gayle Smith in her keynote noted, “dividing up development with different agencies wasn’t getting the results we wanted” so the PFG model explicitly seeks to draw on the strengths of multiple agencies. The MCC, State, USAID, USTR, Treasury, Commerce, and OPIC (just to name a few) are all at the table.  All of the panelists extolled the novel interagency process and its success thus far. Interagency coordination is no doubt a difficult feat (I recently heard coordination defined as an unnatural act between nonconsenting adults* – seems quite apt here) but stronger interagency coordination is not a compelling reason for a new model and certainly should not be the legacy of PFG.
• Data-driven prioritization. Unlike in some other USG development efforts, the selection of focus areas is driven by data and priorities rather than anecdotal evidence. A rigorous constraints-to-growth analysis, borrowing from work at Harvard by Ricardo Hausmann and Dani Rodrik, determines the one or two sectors that most impede broad-based economic growth. Ambassador Francisco Altschul of El Salvador noted that this process allowed space to make difficult decisions in a more open way and that this transparent, data-driven approach helped to build bridges and bring a normally wary private sector to the table.
• No new money. Discipline supposedly drives the PFG model, not resources, and this may well be the biggest difference of PFG. The lack of an attached check has, panelists claimed, already helped to change the nature of the dialogue on both sides. (But it should be noted that all four countries see increases in the FY2013 budget request.)

Potential Challenges for PFG

Discussion of the challenges currently facing both the partner countries and the USG as they implement this new approach was noticeably absent—perhaps because it is all still new. However, three potential pitfalls did arise during the panel.

• Complex M&E plans.  El Salvador is the furthest along in PFG implementation and as such is the only country to have an M&E plan.  For the two identified constraints to growth – insecurity and low tradeables productivity – there are 14 and 6 attached goals, respectively.  Each of these goals then has a number of indicators behind them (33 in total) and each indicator has an associated strategy. Can’t keep it straight? Me neither.  The M&E plan needs to be simple and clear.  (Though kudos for transparency.)
• More than investment roadshow PR? The PFG claims it will engage the private sector in a new way, but we didn’t really hear anything new. The Ambassadors seemed to just claim that PFG helped them promote the country to potential investors.
• Leadership & sustainability. Who’s in charge? It’s unclear who has final say and who will ultimately be responsible for demonstrating the results of the PFG approach. Without an institutional home, how will PFG last once Gayle Smith has moved on?

The verdict is still out on whether PFG will be the future of U.S. development efforts.  The panel offered areas where PFG has the chance to take risks and offer a new approach to development.  Let’s hope that the USG and four PFG partner countries take advantage of this model and capitalize on the opportunity to do things differently.

*This pithy definition courtesy of Rob Mosbacher at a recent Consensus for Development Reform event.

Malawi and Zambia: Parallel Paths, Opposite Outcomes

It’s hard not to draw parallels between the MCC experiences of these two Southern African countries. Both countries initially failed the indicators test, including the control of corruption indicator.  Both then implemented MCC threshold programs and made impressive reforms to eventually pass the indicators test (Malawi in FY2008 and Zambia in FY2009). And finally, with compact eligibility granted, both countries developed single-sector compacts (energy in the case of Malawi and water and sanitation in the case of Zambia) designed to reach a huge number of beneficiaries and yield high economic rates of return.

Two similar trajectories, two very different outcomes.  In the same meeting, the MCC board approved a compact with Zambia that’s set to be signed in May and changed Malawi’s compact status from “operational hold” (which is an MCC management decision) to “suspended” (an official board determination).

Did the MCC board make the right decision to suspend Malawi’s compact?  After all, MCC staff describes the compact as “the best yet” and the expected beneficiary results are staggering: close to $2 billion in net income benefits to nearly six million Malawians.  But my answer is absolutely the board made the right decision.

At its core the MCC is an agency predicated on values, one of which is an unflinching commitment to partner with well-governed countries.  Without this commitment – and a willingness to make the (very difficult) decision to act should governance turn south – the MCC cheats itself and the other 24 partner countries who have taken steps to enact tough policy reforms to achieve and maintain compact eligibility.

But there is still a chance that Malawi’s compact – and partnership with the MCC – can be salvaged.  The MCC made it clear at the outreach meeting that the ball is solely in the Malawian government’s court.  It has 90 days to exhibit distinct steps toward improved governance ahead of the MCC board’s next meeting in June.  Absent meeting these benchmarks, compact termination will be the only course of action for the board.

33 Months Later, Two Board Seats Still Empty

Which again brings up a point the MCA Monitor has called attention to in multiple blogs and reports: after 33 months (!!) the MCC board is still without two of its four public board members.  These public board members bring crucial insights to board deliberations and provide a necessary counterpoint to the five governmental board members.  At each quarterly board meeting, the members make decisions with far-reaching implications (case in point: suspension of the compact in Malawi) and the MCC model and we as a development community would benefit greatly from having a full board in place.

Mali: Military Overthrow Halts MCC Operations

And last not but least, for those keeping a close eye on current events in Mali, the MCC board did discuss Mali but no action was taken.  The MCC has halted operations while it assesses developments in the country.  However timing couldn’t be worse (not that there’s ever a good time for a coup) as the $461 million compact has a mere six months to go before it’s due to close. This coup – even if it is short-lived – could potentially spell disaster for compact implementation as much of the construction and disbursement of funds happens in the fifth and final year for compacts.  And the MCC does not have extension authority to prolong the compact past its five-year timeframe. The MCA Monitor will keep tabs as events unfold and the compact in Mali nears its September 2012 deadline.

Good News: Zambia & Niger

Zambia’s $355 million compact is up for approval. Zambia was one of the first MCC threshold countries and completed its program in 2009. Zambia has since become eligible for a full MCC compact–and had peaceful elections with a change in political parties, signalling further democratic gains–which will be considered by the board, and likely approved. The board will also consider re-purposing Niger’s remaining threshold funds. (Niger’s threshold program was suspended in December 2009; the suspension was lifted in December 2011.)

Bad News: Malawi & Senegal

MCC signed a $350 million compact with Malawi in April 2011, but put the compact on hold in July following political violence and related concerns with Malawi’s commitment to good governance. The president of Malawi recently told international donors to “go to hell.”  The MCC compact would have focused on Malawi’s power sector and was expected to have far-reaching benefits for Malawi’s citizens. I’ve heard several MCC staff say the Malawi compact would have been the “best yet” so they are understandably disappointed at the turn of events (but shouldn’t be motivated by the sunk cost argument or pressure to get money out the door). The board is now faced with a tough decision: maintain the hold, suspend or terminate the compact. Merely maintaining the hold risks looking like inattention. So my guess is that the real debate is between suspension and termination.  The optimist may choose suspension to send a signal to the government while still holding some policy leverage and hope for near-term change. The pessimist may choose outright termination to show that the MCC only works with good performers and can’t spare slim funds or staff time when country performance reverses.

Meanwhile, Senegal is not officially on the agenda, but ongoing concerns with President Wade’s run for a third term in office, perceptions of corruption and spots of violence merit board attention (recall MCC has a $540 million compact with Senegal). The MCC says it is watching the election events and I doubt the board will take any action before the second round of elections this weekend, but it should be prepared for possible policy responses and risks to MCC’s reputation.

No News: Vacant Board Seats

Where are the remaining two non-governmental MCC board members? Rumor has it that a Republican nominee has been in the works for some time but that there is no word on the remaining nominee (which should come from Senator Reid’s office) or when the pair of nominees might be put in place. The makeup of the MCC board is innovative and useful and even being emulated in a new U.S. global development council. It would be nice if the model were fully staffed.

The MCC is also getting ready to release a number of impact evaluations that will certainly show successes and failures. The board, MCC staff and development folks on and off the Hill should be looking for ways to ensure that these results are used to make program improvements, not justify program cuts. As I’ve said before, the MCC should be commended for doing impact evaluations and especially for sharing the bad news.

I’ll be listening for updates on these issues at the MCC’s quarterly town hall meeting Friday. More soon.

UPDATE 3/22/12: Yikes. New country issue for MCC board: military coup in Mali.

Here’s the issue: Each year a number of countries move above or below the LIC and LMIC thresholds, creating year-on-year volatility as a result of countries’ transitioning income groups. This instability is especially problematic for countries that graduate from LIC to LMIC status.  A country could go from passing the indicators test to suddenly failing the test simply due to more difficult medians rather than poor policy performance.

A new approach: In an effort to offer a certain level of predictability for these countries (and the MCC pipeline), the MCC introduced a new approach to allow new LMICs to be considered against their former LIC peers for a period of three years.  The approach states that: “a country that graduates from LIC to LMIC will have its indicator performance considered both relative to its LMIC peers as well as in comparison to the current fiscal year’s LIC pool for a period of three years.” This method was carried through in both FY2011 and FY2012 selection criteria reports.

The approach in principle: The approach should include all countries that transitioned from LIC to LMIC in FY2010-FY2012. Since FY2010, 17 countries have transitioned from LIC to LMIC status. (The volatility is evident within just these three years as Kiribati, the Philippines, and the Republic of Congo all moved above, below, and then back above the LIC threshold between FY2009-FY2012.)

The approach in practice: So far, the approach has only been applied to the Philippines and Indonesia.  These two countries were selected in FY2009 for compact development as LICs and suddenly found themselves in the LMIC category with more difficult medians. In FY2010 as LMICs they failed the indicators test but, when compared to their former LIC cohort, they each passed.

What would broader application mean? Would the method affect LICs not already under compact consideration?  According to this matrix, over the past three years seven countries have passed when compared to their LIC peers despite failing as new LMICs. (Some countries continue to pass as LMICs and therefore are not counted.) If we consider the FY2012 new indicators test, four countries fail as new LMICs but pass when compared to their LIC peers: Guyana, Indonesia, Kosovo, and Paraguay. However, FY2012 is the last year that Indonesia and Paraguay can be considered against the LIC cohort.

Under the MCC’s approach, Kosovo and Guyana still have future rounds in which they could be considered as both LMICs and against the LIC group. An equal application of the MCC’s smart graduation approach suggests the MCC board should be thoroughly considering all new LMICs that pass the indicators test when compared to their former LIC peers, not just those already in the compact pipeline.

Here’s my concern: MCC has a number of compacts in the pipeline, and this $898 million is only the request. Since its inception, the final MCC appropriation has been lower than the request, in some cases by as much as $1.3 billion. (And it’s worth bearing in mind that the MCC was originally envisioned as a $5 billion per year program.) But assuming the request is fully funded, what does $898 million get the MCC in FY2013?  And what’s at stake should the level shrink further?

The request should fund second compacts in Ghana, Benin, and El Salvador in addition to programs under the revamped threshold program in Honduras and Nepal. Both Ghana and El Salvador are Partnership for Growth countries, and the MCC has been leading efforts to determine constraints-to-growth in these countries—analyses that will underpin the overall programs. Here’s a quick look at how the MCC plans on funding upcoming compacts.

Beyond the compact pipeline, a reduction of the $898 million request could have serious consequences for an MCC model predicated on selectivity, transparency, and evaluation – all key components that cost money to execute effectively.

And here’s what puzzles me: the MCC’s model puts it at the vanguard of U.S. development practice, testing innovative aid models and methods that have since been adopted among other U.S. development agencies.  Yet it keeps getting the short shrift.  The constraints-to-growth analyses we see in Partnership for Growth, the independent, soon-to-be-publically-available impact evaluations at USAID, heck even the new Global Development Council established by President Obama, all have seeds in the MCC’s work. Considering that massive development contribution for such a relatively tiny budget, I’m hoping when Congress shakes the MCC Magic 8 Ball during their upcoming deliberations it will come back: Without a doubt.

The development community breathed a sigh of relief on December 23 when President Obama signed a nine-bill spending package that included healthy funding for the International Affairs budget.  But there is more in this behemoth than topline funding numbers.  Tucked away in the State, Foreign Operations portion are new income definitions for the Millennium Challenge Corporation’s (MCC) low income and lower middle income country categories.

At first glance, this may seem like news only for MCC wonks and income data nuts, but the new specifications will have far-reaching effects.  The new income definitions will create new low income country (LIC) and lower middle income country (LMIC) groups with new indicator medians that could change a country’s passing/failing status.  MCC legislation also dictates that only 25% of MCC funds may be used for LMICs; the new income definitions will alter the countries that fall under this cap by altering the income country groups.

So what are the new income groups? The MCC will continue to use the same metric – gross national income per capita as measured by the World Bank – to determine income groups, but the cut-offs have been adjusted.  In a nutshell, the low income group will now be the poorest 75 countries and the lower middle income group will be the 76th poorest country at the lower bound and World Bank’s LMIC income ceiling at the upper bound.  Previously, the cut-off between LIC and LMIC was IDA’s historical ceiling for LICs.  In 2010, the MCA Monitor proposed this solution to mitigate the negative effects of country fluctuation within income groups and the LMIC cap. You can see how these changes affect the FY2012 pool of countries in the table below.

By assigning the LIC/LMIC threshold an absolute value (the 75^th poorest country) rather than a constantly changing income level, the new income definitions will provide more stability to income country groups that previously experienced a high level of fluctuation.  Take, for example, the Philippines. It has seen sustained income growth over the past eight years, but it has changed income categories three times since the MCC’s inclusion of an LMIC category in FY2007.

How will the new income definitions affect MCC countries’ FY2012 indicator scores? Fifteen countries move from LMIC to LIC status: Bhutan, Republic of Congo, Egypt, Georgia, Guatemala, Indonesia, Iraq, Kiribati, Micronesia, the Philippines, Sri Lanka, Swaziland, Syria, Tuvalu, and Vanuatu.  The table below shows those MCC countries that have a different result on their indicators test under the new income definitions.

There are six new results under these income definitions.  (Note that more countries shifted income group, but had the same indicators test result). The changes are at times quite dramatic, such as Indonesia moving from passing 7 indicators as an LMIC to 17 indicators as a LIC. There are also less serious shifts, such as Guatemala, which only failed by corruption as an LMIC and now passes as a LIC.

While the MCC indicators test is still a useful but imperfect method of identifying effective partners, this small change in policy makes a significant improvement in making the process fairer and more effective.

Last Thursday, December 15, the Millennium Challenge Corporation (MCC) board of directors convened for its annual meeting to select eligible countries for FY2012 MCC assistance.  As a result (and largely in line with MCA Monitor predictions), the board selected Benin and El Salvador to develop second compacts, and selected Honduras and Nepal to develop threshold programs.  In addition, the board reselected Georgia, Ghana, and Zambia to continue compact development and approved Cape Verde’s second compact.

Second Compacts for Benin and El Salvador

Benin and El Salvador are FY2012’s newly compact eligible countries and will now begin developing second compacts. Both countries are notable for having passed the new indicators system while failing the old system (due to only passing one indicator in the Investing in People category).  Under the new system, El Salvador passes 14 indicators and Benin passes 11 indicators.

Benin completed its $307 million compact in October 2011. The compact focused on expanding the Port of Cotonou, promoting land security, and creating a more efficient judicial system.  El Salvador is due to complete its $461 million compact in September 2012. As a part of the Partnership for Growth initiative, El Salvador recently signed a 2011-2015 Joint Country Action Plan with the U.S. government.

Honduras and Nepal: Dwellers on the Threshold

After choosing no eligible countries for the revamped threshold program during last year’s meeting, the MCC board made two interesting selections this year: Honduras and Nepal. To recap: the new threshold program will use the same diagnostic tool as compacts – constraints-to-growth analysis – to identify and support targeted policy and institutional reforms. This is in contrast to the previous iteration of the threshold program which singularly focused on moving certain indicators from failing to passing.

The MCA Monitor predicted a second compact for Honduras based on its exemplary first compact implementation record and its policy performance on the indicators test. Honduras passes 16 of 20 indicators on the new selection system but narrowly misses the control of corruption indicator, scoring in the 47^th percentile. Presumably this is why the board elected to give Honduras a threshold program rather than a second compact.

Awarding a threshold program to a country with a completed compact is new territory, but it also presents Honduras with a great opportunity.  By undergoing the same analyses used in compact development, Honduras can take a rigorous approach to identifying and reforming policy areas that inhibit economic growth.

Nepal is another notable threshold program choice considering it passes both indicators systems this year. The selection of Nepal is a signal that a major component of the revamped threshold program will be the partnership capability of a country. The threshold program will be a chance for the MCC and the government of Nepal to work together on a smaller-scale and will provide important insights into the country’s capacity for an expanded set of investments.

Cape Verde the First Country to Embark on a Second Compact

The MCC board officially approved Cape Verde’s second compact, worth $66.2 million.  Cape Verde was the first country to be made eligible for a second compact, in FY2010.  Its second compact will focus on reforming the water, sanitation, and land management sectors.  Cape Verde performed very well in the FY2012 indicators test, passing 14 of 20 indicators in the new system. Cape Verde’s first compact, worth $106 million, was completed in October 2010.