The Senate’s Ideas for MCC: All Good in Theory, One Questionable in Practice

The Senate Appropriations Committee’s recent markup of the FY17 State and Foreign Operations spending bill brought good news for the Millennium Challenge Corporation (MCC). The topline figure of $905 million for the agency, if enacted, would give MCC its biggest budget since FY10. Though the (not yet marked up) House figure is likely to be somewhat lower—the draft bill includes $901 million, the same as FY16’s appropriated level—the strong support from the Senate holds promise for a small budget boost this year.

The bill also contains provisions that have big implications for MCC operations. New authority to engage in concurrent compacts in a single country, which was included thanks to an amendment from Senator Chris Coons (D-DE), would enable MCC to operate on a regional level. And provisions adjusting the criteria MCC uses to select partner countries could influence where MCC works. These are reasonable (even good!) ideas in theory, but the proposed eligibility requirement gives me some pause and could be challenging to apply in practice.

The provision for concurrent compacts is a welcome one. The fact that it comes on the heels of a similarly-worded bill advanced last week by the Senate Foreign Relations Committee suggests fairly wide support. And rightly so. Granting concurrent compact authority is the best way to enable MCC to pilot regionally-focused investments in neighboring countries. This is important because major constraints to growth can be cross-border in nature. Though MCC often invests in projects that have an inherent regional component (like infrastructure or energy), the agency hasn’t been able to coordinate programming across borders well because neighboring countries are rarely at the same stage of compact eligibility or design at the same time. Of course, regional programs are more complex and higher risk, so MCC should—and its stakeholders should expect it to—proceed slowly and cautiously.

My lingering questions center on a provision related to eligibility requirements for countries under consideration for a subsequent compact. What’s good about the language is its implicit affirmation for subsequent compacts; indeed, I think they are unquestionably the right way forward for MCC, even though they won’t be the right choice for all countries. What’s trickier is the proposal for picking which countries should be eligible.

The basis for MCC’s country eligibility decisions is a “scorecard” of 20 quantitative, third-party indicators of policy performance. Generally speaking, countries must perform better than their income-level peers on half of these indicators (including the “hard hurdle” indicators relating to corruption and democracy/civil liberties) in order to be considered for a compact. For countries under consideration for second compacts, the country is also judged on the quality of the partnership during its first compact.

The Senate bill adds an additional requirement. Countries must not only perform better than their income-level peers on the scorecard, they must demonstrate “significantly improved performance across the eligibility criteria.” Now, this is a reasonable expectation in theory and fine for general guidance.  Indeed, countries should demonstrate “even better” governance to continue a relationship with MCC. The problem is that as a hard and fast rule it’s methodologically dubious. Changes in score for most of the indicators (especially those in the “Ruling Justly” category) for a given country over a period of a few years are almost always small and well within wide margins of error. Such small changes do not reflect substantive shifts in governance climate or policy, which generally happen over a very long time horizon. In addition, since there can be important differences across years, either in an individual indicator’s methodology or in how MCC uses the indicators it can be difficult, even inappropriate, to compare scorecard performance over time. Furthermore, requiring improvements across the indicators makes little sense for countries that already perform at a sufficiently high level in certain areas (e.g., Nepal’s girls’ primary education completion rate of 107 percent, Cape Verde and Ghana’s nearly-maximum Political Rights score) or for indicators for which improvement is not always unambiguously unidirectional (e.g., having a bigger and bigger fiscal surplus is not necessarily good policy, nor is spending a higher and higher percentage of GDP on primary education).

It’s fair to think that the policy performance requirements for subsequent compact eligibility should be harder. But the fact is they already are. It is actually pretty exceptional for a country to pass the scorecard relatively consistently over a period of seven or more years (from the time that a country is first selected to when it would be under consideration for a second compact). Only 12 countries that passed seven years ago continued to pass at least half the time since then; only six countries passed for all seven years. Consistently good performers that are slogging away on the long-term business of building institutions and managing to avoid major backsliding are the right candidates for MCC to consider for follow-on investments.