MCC Country Changes: Good Approach, Uneven Application

If a Millennium Challenge Corporation country changes income groups and no one is around to give it a compact, does it make a sound? In FY2010, the MCC adopted a useful approach to evaluate countries that transition from low income country (LIC) to lower middle income country (LMIC) status. But recent history suggests the approach is only being applied to countries already in the compact pipeline.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.