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The Board of Directors of the Millennium Challenge Corporation will hold its quarterly meeting tomorrow, with a public outreach session Thursday.  Some hefty issues on the table for discussion – country updates and program continuation discussions (most notably, Honduras and Niger), and FY10 country selection issues (most notably, the FY10 candidate country list, selection criteria and graduation dilemmas).

The main country-specific issue facing the Board is what to do with the Honduras compact now that State Department terminated the non-humanitarian assistance it had earlier suspended.  One step closer – but not quite there – to officially calling the government overthrow a “coup,” an action that would invoke Sec. 7008 of the FY09 State and Foreign Operations Appropriations Bill and leave agencies no choice but to terminate assistance (or invoke their notwithstanding authority if they have it).  Apparently, the overthrow was not a military coup, a distinction that is lost on me (see my earlier post) and Chairman of the House Foreign Affairs Committee Howard Berman.  In fact, we both used the old adage: “if it looks, walks and quacks like a duck, let’s call this bird a duck.”   The MCC suspended new disbursements back in June but has continued to disburse against prior commitments.  What to do about the roughly $15 million of uncommitted funding will be the focus of tomorrow’s discussions.   Despite State Department’s press release, the MCC CEO, after consultation with the Board of Directors, is the one mandated the responsibility to officially suspend or terminate MCC funding.  I have no doubt that the MCC Board will decide to terminate all uncommitted funds but, as in the case of Madagascar, it does cost money to conduct a responsible, safe and orderly close-out and I hope that cost is accounted for in the decision.

In addition to Honduras, the Board is likely to be briefed on the situation in Niger, where recent actions by President Tandja threaten rule of law and constitutional order that led to blocked EU aid disbursements and warnings from the UN, U.S., France, ECOWAS and Canada.  The MCC is in year 1 of a 3-year, $23 million threshold program.

On FY10 country selection, the Board will be approving its list of FY10 candidate countries and FY10 eligibility criteria to be used in this year’s selection round.  Though a fairly straightforward exercise, the related issue likely to dominate discussion is what to do about countries that are in the process of preparing compacts in one income pool and graduate to a higher level.  Although many countries have graduated throughout the MCC’s existence, it hits the fan this year because three countries in the process of designing their compacts – Indonesia, the Philippines and Colombia -- graduate to a higher income category which, by the MCC’s authorizing legislation, impacts or precludes their access to MCC finance.  Indonesia and the Philippines graduate from low-income (LIC) to lower-middle-income (LMIC) status, where MCC resources are capped at 25% of its annual appropriation.  In effect, this means they would compete with Jordan (currently slated to be the one LMIC compact in FY10) for the estimated $250 million total available this year for LMICs.  The Philippines, which is in the final stage of finalizing a compact in the range of $500 million, probably isn’t ecstatic with this aspect of its “successful” growth record.  Colombia did so well this year, it graduated out of the MCC candidate pool entirely.

Again, the issue of graduation is not new to the MCC.  Of the current LMIC compact countries, 5 started as LICs.  The difference is that they all signed their compacts before they graduated, thereby allowing the entirety of their compact funding to come from the LIC pot and the issue of graduation to be put on the back burner.  But this stew is going to keep bubbling and brewing and the Board is going to have to come up with a recipe to address the dilemma.  In my mind there is a need for an immediate fix to allow the U.S. to fulfill its partnership commitments with these countries, with the most sympathy for the Philippines, a country that has worked hard to meet the standards of the MCC (it would have passed the indicators squarely had it remained a LIC) and will likely finalize its compact proposal in FY10.  That fix will need to be proposed and adopted quickly, most likely as an amendment to the FY10 appropriations bill which is supposed to be completed this month.   Without it, the MCC’s hands are tied as the legislation is quite direct.  The easiest option, from an appropriator’s position, would likely be a one-year (only!) ability to exceed the LMIC cap.  Or they could just increase the MCC’s total FY10 appropriation to $3 billion, allowing for up to $750 million to go to LMIC compacts (ha!)

But the issue really requires a long-term fix for several reasons.  First, the income data are both volatile and imprecise measures of economic prosperity meaning that countries are going to flip over and under the income cut-offs with new data and changing global conditions, and, in general, don’t exactly mean a country is not poor.  Second, many of the first round good performers that will deserve second compacts have since graduated to the LMIC category.  With more graduates expected through the years, the bulk of good candidates are going to be LMICs, leaving a small pool of bankable countries in the category with 75% of the funding.   I will be doing more thinking on a long-term fix to the problem.  Couple of early thoughts to inspire folks to react and send your own proposals:

  • Redefine low-income, allowing the model to remain concentrated on low income countries but with a larger (still credibly low-income) pool.
  • Institute a graduation grace period (2-3 years) within which a graduated country can still access the pool of resources of the income category in which it was originally deemed eligible.  This is essentially how the World Bank operates.
  • Raise or remove the LMIC cap (for the record, I am not a fan of this idea; it is more palatable if it comes with a substantially increased overall MCC budget)

And there’s probably some of you out there who think there should be no change at all – that perhaps there should be greater rigor and selectivity at the country selection stage and/or that no country should get a second compact.  I (and I’m sure the MCC) would love to hear your thoughts and ideas.

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.