Report by USCCB on Millennium Challenge Account, August 2002

A  Proposed Conceptual Approach for Eligibility

Office of International Justice and Peace
United States Conference of Catholic Bishops

August 13, 2002

The United States Conference of Catholic Bishops (USCCB) commends and welcomes the Millennium Challenge Account (MCA) proposed by President Bush in March. This discussion paper is offered by the USCCB Office of International Justice and Peace as a contribution to the process now underway of defining the shape of the MCA.

Our conceptual proposal can be summarized as follows:

1. The MCA's commitment to increase substantially U.S. foreign assistance and refocus that investment on sustainable human development, specifically the fight against global poverty, deserves to be fully funded. To do so would be a significant step forward and would be a sign of new U.S. leadership in promoting development in the poorest countries.
   
   
2. The Bush Administration rightly has focused on the need to improve the effectiveness of foreign assistance, to avoid wasting funds, and to show positive early returns from MCA investments to ensure strong support from the American public. The three eligibility criteria (rule justly, economic openness, and investing in people) proposed by the Administration to help achieve these objectives should be applied in ways that will foster future achievements rather than just reward past success. Moreover, they should be applied in ways that take into account legitimate differences in circumstances among countries and avoid a one-size-fits-all approach.
   
   
3. The three eligibility criteria should be complemented by efforts to promote local ownership, broad participation by stakeholders, and a greater role for civil society. At the heart of this approach is incorporating into the MCA process the poverty reduction strategy paper (PRSP) or an equivalent participatory national poverty reduction strategy.
   
   
4. The process for determining which countries receive aid through the MCA should have two phases. In Phase 1, any low-income country would be eligible to apply for MCA funds if the country meets a minimum standard of just rule, defined broadly in terms of human rights and government accountability (i.e., an anti-corruption standard). In Phase 2, the United States would choose among applicants based upon the extent to which a government's poverty reduction strategy (or equivalent) and proposal for funding address the Administration's three criteria, as well as other factors essential to the effectiveness of aid (e.g. stakeholder participation and local ownership).
   
   
5. Those countries which are not eligible under Phase 1 to apply for MCA funding should be considered under the regular foreign aid budget, with particular attention given to channeling development aid through non-governmental organizations. Those countries which are eligible under Phase 1 but do not meet the requirements under Phase 2 should also be considered for funding under the regular foreign aid budget.

I. Incorporating legitimate conditions while not leaving the poor behind

Concerns about human rights and good governance should continue to be integral to U.S. foreign policy, in general, and U.S. development programs, in particular. At the same time, ways must be found to aid the hundreds of millions of people who are trapped in conditions of grinding poverty but whose governments do not fully live up to internationally-recognized human rights norms, are not as accountable as they should be, and have not adopted certain economic policies.

A. Potential problems with the MCA's conditions of eligibility.

The MCA's criteria for eligibility – a government must rule justly, promote economic openness, and invest in its people – could be valuable if they are interpreted appropriately and with some degree of flexibility. In applying the criteria, it will be necessary to take into account local perspectives and to permit heterogeneous approaches that correspond to the recipient country's particular circumstances and level of institutional development, while insisting that international human rights standards be met. Excessively stringent application of the three criteria could be counter-productive if they effectively exclude large numbers of the world's poor from an opportunity to benefit from the MCA. Therefore, we would propose applying the three criteria in choosing how funds will be awarded and allocated among eligible recipients, while using a lower threshold to determine eligibility for the following reasons:

• There is a potential conflict between the eligibility criteria and the MCA's poverty reduction objective, since severe poverty is often accompanied by poor political, economic and social performance. Countries that are high performers, while perhaps able to show that, in the short-term, foreign assistance can work, are not likely to be the countries most in need.
• The conditions may be too broad and subjective to serve as objective eligibility criteria. Some interpretations of "ruling justly," for example, would exclude most poor countries.1 A government may be capable of enforcing basic human rights policies but may be years away from the more difficult task of creating effective democratic institutions. Moreover, it is extremely difficult to develop objective criteria that fairly capture the widely differing circumstances of individual countries.
• Using the criteria as conditions for eligibility could tend to reward past success but not necessarily foster future achievements, positive trends and progress in countries where appropriate aid might make that more likely.
  

B. An alternative proposal for achieving MCA's objectives

It may be possible to address these concerns by adding a competitive grant element to the MCA process, along the lines suggested by the Center for Global Development.2 Our proposal envisions a two-phase process: (1) Phase 1 – establish several minimum threshold conditions (incorporating basic human rights and anti-corruption efforts) for country eligibility; and (2) Phase 2 – use the Administration's three criteria as factors to be considered, along with others, in choosing which of the eligible countries will receive MCA awards. This two-step process would include the following elements:

• Establish a maximum per capita income level, such as the ceiling for IDA eligibility, as a condition for participation in MCA funding;
• Define "rule justly" in terms of human rights and accountability, as a threshold condition that countries must meet to be eligible to apply for grants;
• Couple this threshold condition with a requirement that a country must have a PRSP or equivalent participatory poverty reduction strategy under implementation, and evaluate the extent to which a country's PRSP would foster the Administration's three criteria;
• Evaluate the extent to which the country's PRSP incorporates other elements, such as local participation, to address concerns about the effectiveness of aid; and
• Allow grant applications not just from national governments but also from non-governmental organizations and local communities.
  

By incorporating the PRSP (or equivalent national strategy), the MCA can eliminate the need to establish and decide on the appropriate weighing of the Administration's three eligibility standards (beyond the threshold human rights and accountability standards). The PRSP would reflect differences in country circumstances in a way that an extensive set of universally applicable eligibility standards could not. In this way, MCA funding potentially would be available to all poor countries making good-faith progress in terms of political, social, and economic performance. Furthermore, countries would have an added incentive to develop and improve national poverty reduction strategies, which would be particularly valuable in ensuring local ownership (i.e. policies, programs and projects designed by recipients not by donors). Finally, while not without fault, the PRSP has proven useful in the debt relief program; it would be helpful to build upon and not duplicate that process.

II. Phase I: Applying a threshold interpretation of "rule justly"

In order for a country to be eligible to submit a grant application for MCA funding, the country would have to meet a threshold standard of "rule justly" that would be less stringent than that under Phase II. This threshold standard would focus on whether governments are making good faith efforts (1) to respect basic human rights, and (2) achieve a minimum level of government accountability (i.e. an anti-corruption standard). A government would not be eligible to apply for MCA funding if it is involved in systematic and widespread violations of human rights and/or suffers from systemic corruption.

1. Human Rights.
   
   Respect for human rights is an indispensable condition of a just and sustainable development policy. Imposing a human rights condition is consistent with broader concerns that human rights should be an integral part of U.S. foreign policy and that it is therefore appropriate to condition aid on a government's human rights record.
   
   We suggest that a government would be ineligible to apply for MCA grants if:
   
   
   • there is a history of systemic and widespread human rights violations perpetrated by government agents or by groups supported by or linked with the government; and/or
     
     
   • good faith efforts are not being made to develop and enforce legislative, administrative and judicial means of protecting human rights.
   
   In making these assessments, significant consideration should be given to the research results and weighted judgments contained in the periodic reports of the State Department and competent nongovernmental organizations.
   
   
2. Systemic Corruption
   
   Corruption is a significant obstacle to economic development in many countries. A minimum level of government accountability is needed to ensure that U.S. aid does not contribute to corruption and to guard against misdirection of foreign assistance funding. Most governments have some level of corruption, so it would be unrealistic and overly restrictive to deny eligibility for foreign assistance whenever corruption is present. A more reasonable standard would be to evaluate whether governmental corruption is so widespread that the government cannot credibly claim to administer foreign assistance funds properly. The task of measuring and reporting corruption is a relatively new endeavor, and more work is needed in this area. We suggest that a government be considered ineligible to apply for MCA funding based on corruption if:
   
   
   • there is widespread high-level corruption among government officials; and/or
     
     
   • the government is not making good faith efforts to implement a public anti-corruption action plan.
   Decisions on the presence of widespread high-level corruption should take into consideration but not be governed by the government's rating according to appropriate international watchdog groups such as Transparency International, and/or by appropriate international organizations. Progress toward greater transparency in public sector management should be an integral part of assessing whether a government is implementing an adequate anti-corruption policy.
   
   Because these standards are difficult to apply, it would be preferable to exclude only the most serious cases from eligibility for grants on this basis, but then to provide strict scrutiny on accountability aspects of such a government's national poverty reduction strategy and grant application if there is serious cause for concern about corruption. For example, in such a case, serious attention would be needed to evaluate whether there were adequate mechanisms for independent monitoring of program or project implementation and expenditure of funds.
   
   
3. Objective Criteria and Their Limits
   
   Judgments about country eligibility in accordance with these standards will inevitably entail a substantial degree of subjectivity. Some advocacy groups have called for more objective approaches, by relying on ratings of third party groups, but these, too, are ultimately highly subjective. While the considered opinion of reliable third parties should be taken into account, they cannot be a substitute for the considered judgment, based on the available information, of those charged with managing MCA funds. Given the Bush administration's expressed intention to de-link the MCA from political concerns unrelated to poverty reduction, every effort should be made to ensure that these judgments do not become politicized. For this reason, it will be important that determinations of the eligibility of each country be carried out in a transparent, participatory manner. This goal could be achieved by formation of an inter-agency committee of U.S. government officials who will decide country eligibility in an open process after consulting with a range of experts, including those in nongovernmental organizations that specialize in human rights, development and governance issues.3 Decisions denying country eligibility should be accompanied by a clear statement of the basis for the rejection.

Phase II: Evaluating Grant Applications

A country eligible to apply for an MCA grant would submit a PRSP or equivalent national strategy, along with its application for programs and projects that are included in or fully consistent with that national strategy. The PRSP and grant applications would be evaluated, on a competitive basis, by the MCA body charged with that task. The selection of aid recipients and the funding of specific projects should take into account the Bush administration's three criteria as well as other factors that are essential to an effective national strategy and that would promote improvements in the PRSP. In applying the three criteria within the context of the participatory process, we intend to provide appropriate incentives for governments to improve their performance, while also ensuring that the largest number of poor people will benefit from aid.

1. Factors Essential for an Effective National Strategy
   
   To make MCA funding more effective in delivering relief to the poor, it is important to build on the lessons learned in the PRSP process. Poverty reduction cannot be accomplished primarily through increased spending in the social sector but must also address deeper structural issues which can only be done effectively through a process which assures strong local ownership. To strengthen the quality of anti-poverty strategies, we recommend that the MCA evaluation of national strategies and grant applications take into account the factors mentioned below. These factors are more fully discussed in the June 24, 2002 submission on the MCA by Catholic Relief Services, the relief and development agency of the Catholic Bishops.
   
   Broad stakeholder participation: The evaluation should assess whether the development and implementation of the national strategy included adequate participation of all stakeholders concerned with economic development and poverty reduction. Broad, qualitative participation from a wide range of governmental and civil society representatives at the national and local level should be encouraged, consistent with the goal of strengthening democratic governance, and participatory processes and institutions in the country. In addition, the implementation of programs or projects within the national strategy should give appropriate responsibility to district and municipal governments rather than maintaining excessive levels of centralized expenditures and control.
   
   Use civil society to promote accountability: The national strategy process should encourage the role of civil society in holding governments accountable, both financially and in terms of results. Ideally, the national strategy should build in mechanisms and funding to strengthen the role of civil society.
   
   Fund public-private partnerships: The awarding of MCA funding should give preference and priority to governments whose national strategies include effective partnering with civil society organizations.
   
   Allow civil society grant applications: In countries eligible to apply for grants under the MCA, non-governmental organizations and local communities should also be allowed the opportunity to apply for grants for projects and programs included in or fully consistent with the country's national poverty reduction strategy. MCA funds awarded to these grantees should be disbursed directly to them rather than depending on governments to channel the funds.
   
   
2. Evaluating the Grant Application and PRSP according to the three criteria
   
   Rule justly. At the grant selection stage, it would be appropriate to consider a broader range of governance factors under "rule justly" than the human rights and anti-corruption elements examined in Phase I. Elements of the rule of law, such as the independence and effectiveness of the judiciary, would be appropriate to take into consideration in the competitive process. Progress towards full and effective political participation would also be an important factor, as would discrimination based on ethnicity, race, religion, gender, or national identity. Due consideration should be given not just to the current status of governance in a country but also to dynamic factors such as recent progress in improving governance, and the extent to which a PRSP offers a credible basis for concluding that its implementation would effectively deal with deficiencies. The PRSP should also be used to strengthen the capacity of civil society entities to hold their government accountable. The assessment of "ruling justly" will involve many qualitative elements. Thus, it would be important that decisions on the relative ranking of grant proposals be made, not on the basis of rigid quantitative criteria, but on the basis of the review and considered judgment of persons with expertise in the relevant fields.
   
   Economic openness. The evaluation of economic openness should give special weight to policies, programs and institutional arrangements likely to promote economic opportunity for indigenous small-scale agricultural and business entrepreneurs and otherwise to enable the poor to participate in the market economy. As the circumstances of each country are unique and reflect a wide variety of traditions and resource endowments, the evaluation should not require strict adherence to economic orthodoxy or a minimalist role for government in the economy. Home-grown approaches as to the composition, sequencing and timing of reforms and to the design of regulatory frameworks should be expected and encouraged, especially when they are designed to protect and promote the interests of the poor.
   
   Investing in people. Whether a government is investing in its people should be assessed by reference to the adequacy of the PRSP or equivalent national strategy, particularly the education and health sectors, and by the extent to which the program proposed for financing will advance priorities identified in the strategy. Investing in people is a long-term process, and so it would not be appropriate to require significant measurable results in the short term. Rather, some measure of inputs should be considered as benchmarks that would lead to measurable results in terms of poverty reduction goals over a period of time. That said, the adequacy of inputs should not be determined solely by reference to the budgetary amounts devoted to social services, since such a measurement would not take into account budget constraints and the limited resources of the poorest nations.

IV. Technical Assistance and Alternative Delivery Mechanisms

Some portion of MCA funds should be used to provide technical assistance to interested countries who are not eligible to apply for MCA grants, either because they fail the minimum "rule justly" standards or because they do not have a PRSP or equivalent national poverty reduction strategy. Funding to assist a country in developing a national strategy is especially important because many countries do not have the necessary experience and require assistance to proceed. Countries need not only funding but adequate time to plan and organize. Also, funding should be available to help finance civil society's involvement in the design of the national strategy. International private voluntary organizations can be used to support the consultative process, and help build links between local civil society and the government.

For countries whose governments are not interested in meeting MCA criteria or in addressing the needs of their poor, we suggest that funds be allocated from the regular foreign aid budget (if it is not possible to reserve funds in the MCA) in order to develop delivery mechanisms and other creative means to assist the poor in those countries. This work could be undertaken by establishing a task force of public and private development professionals to dialogue on how to address needs in poorly governed countries, with particular attention to channeling assistance through non-governmental organizations and possibly local communities.

Notes

1. See, e.g. the World Bank's proposal for a comprehensive development framework, in which "rule of law" is defined as an "effective system of property, contract, labor, bankruptcy, commercial codes, personal rights laws, and other elements of a comprehensive legal system that is effectively, impartially and cleanly administered by a well-functioning, impartial and honest judicial and legal system. (www.worldbank.org/cdf/cdf-ext#part1, 21 January 1999).
   
   
2. Center for Global Development, Guiding Principles for Design and Implementation of the Millennium Challenge Account, Nancy Birdsall, Saraj Lucas, Sonal Shah (www.cgdev.org).
   
   
3. A similar process could be used to award grants.