Should the Trump Administration Cut USAID to Expand MCC?

There are a lot of uncertainties about the direction US development policy will take under President Trump. One looming question is whether the administration will pursue significant structural changes to the landscape of US foreign assistance agencies. One proposal—put forth several years ago by Republican lawmakers (Paul Ryan’s FY2015 budget) and, more recently, by the Heritage Foundation—calls for scaling back or phasing out the US Agency for International Development (USAID) and elevating the Millennium Challenge Corporation (MCC) as the lead foreign assistance agency. Though the spirit of the proposal—a fundamental desire to make US foreign aid more effective—deserves widespread support, any plan to supersize MCC by drastically cutting or eliminating USAID is impractical and counterproductive for two overarching reasons. First, the characteristics that make MCC so appealing also limit its scalability. Making the agency significantly larger would compromise much of what makes it work as well as it does. Second, scaling back or phasing out USAID would eliminate several important functions of US foreign assistance that MCC is not designed nor well-suited to address.

Let’s take a deeper look at these two concerns.

The Problem with a Super-Sized MCC

Shifting substantially more resources to MCC would require some combination of more partner countries and/or bigger country “compacts” (the agency’s five-year grants supporting investments in economic growth). While MCC has room for modest expansion in these areas, significant expansion would dilute the agency’s core model and compromise much of what MCC’s fans like about it, including its often-touted effectiveness. In other words, there are a lot of reasons to love MCC, but it is possible to love it to death.

More Countries: MCC is very selective. In its entire 13-year history MCC has signed compacts with only 26 countries (compared to USAID which works in over 100). MCC picks partner countries based on their policy performance, using country “scorecards” of 20 policy indicators to determine which low and lower middle income countries are relatively well-governed. The approach is grounded in the idea that partnering with good policy performers rewards countries taking responsibility for their own development, creates incentives for reform, and potentially increases the effectiveness of MCC investments. As it turns out, the set of countries that meet MCC’s governance criteria changes little on an annual basis. Few new contenders emerge each year (see below), and MCC is already working with most of the others, suggesting the agency’s pipeline of plausible partners is limited.

Number of New Countries Passing MCC’s Eligibility Indicator Criteria for the First Time

There are a few ways to think about expanding MCC’s pipeline of countries. Some options are probably unappealing—lowering the bar on the “good governance” criteria, working with more of the tiny (but well-governed) island microstates MCC has typically passed over. Other choices are promising—embracing the idea of subsequent compacts for well-performing partners, making small but fundamental adjustments to how MCC defines candidate countries, and giving the agency authority for concurrent compacts to enable regional programming. However, even with these changes, the incremental increase in the number of potential partnerships would be small. Furthermore, with the exception of subsequent compacts, most changes would result in a one-time boost in new potential countries (see FY12 in the graph above), not a consistent flow. Simply put, if selectivity on policy performance is a valuable characteristic of MCC, the agency will not accommodate a lot of new partnerships.

Bigger Compacts: Bigger isn’t always better when it comes to compacts. True, an investment ought to be “big enough” to get the necessary attention from a partner country government to implement the program and make accompanying reforms. But there are important considerations of timeline, ownership, and program quality, as well. For example, programs must be implementable within a fixed five-year timeline. MCC, which gives partner countries the lead in implementing their compacts, often faces a tradeoff between building the capacity of local implementers and getting things done quickly, under pressure to execute the investment on time. In recent years, MCC has moved toward somewhat smaller and more streamlined compacts, often in just a single sector, to make them more manageable to implement under time constraints. Moving toward substantially bigger compacts would jeopardize either program completion or MCC’s hallmark country-led implementation.

Another key characteristic of MCC is that it chooses investments that are likely to yield a substantial economic rate of return. That is, the value of an investment’s benefits is expected to exceed the cost incurred to achieve them. MCC’s expected results stem much more from the quality of the program chosen than how much money is spent. In fact, some compacts in the past may have been stronger had they been smaller (and not included projects with weak or no economic justification). This suggests that much larger compacts could, in some cases, dilute program quality and threaten MCC’s lauded focus on results.

The Value of USAID

All that said, conveying the folly of a supersized MCC does not address the question of USAID’s additive value. In short, it would be a great mistake to phase out USAID or significantly scale back its development accounts since these fulfill several functions critical to American values and interests that MCC—by design—cannot. Key examples include USAID’s:

Humanitarian Role: USAID manages responses to man-made and natural disasters. MCC’s way of doing business is well-suited for addressing constraints to growth, but it takes 2-3 years to develop a program. It cannot respond quickly to urgent needs like disease outbreaks (see Ebola) and famine.

Work in Fragile and Conflict-Affected States: As mentioned above, one of MCC’s distinguishing features is that it works only in relatively well-governed countries. Some of its partners are considered fragile (for example Niger and Liberia), but they’re the among the better-governed of the lot. Most fragile and essentially all conflict-affected states will remain outside MCC’s remit. However valuable selectivity is for MCC, it is not necessarily appropriate for the range of other US government development efforts. For example, humanitarian relief and post-conflict reconstruction are usually concentrated in more fragile policy environments. And to the extent that the Trump administration sees a strong role for foreign assistance to counter violent extremism, the ability to work in fragile and conflict-affected states is critical. Furthermore, if the US wants to continue its leadership in the fight against extreme poverty, it must be able to work where extreme poverty is increasingly concentrated.

Support for Non-Growth Objectives: MCC was designed with a single focus—reducing poverty through economic growth. This allows the agency to pursue development objectives in a highly targeted way. However, Americans value other objectives that are often tied to growth but may not be among the binding constraints that MCC would seek to address. Things like improving the health (and healthcare systems) of people in developing countries, supporting civil society, and combating human trafficking, for example, project American values, reflect Americans’ interests, and help protect Americans at home.

Long-Term Presence for Long-Term Needs: Development is a long process. South Korea is a notable success story that had years of extraordinarily fast growth; even so, it took the country well over 30 years to become the middle class democracy it is today. The drawn out process of development calls for the kind of long-term relationships and continuity (where warranted) that USAID can provide. MCC, on the other hand, works in discrete five-year increments with no assurances of continued support after a program concludes. This kind of time clock can be appropriate for the types of discrete interventions MCC funds (like the rehabilitation of a road segment). It provides incentive for timely implementation by the partner country and forces a point of reassessment about whether to have follow-on engagement. MCC’s engagement with some countries has extended beyond five years through a second compact. However, since the process of program development starts over for each compact, there has been a 2-4 year gap between closing the initial program and implementing the next. MCC and its partner countries choose investments knowing they must work with this time-delineated, start-stop approach; this can mean forgoing investments that don’t fit neatly into this timeframe. In fact, discrete, terminal programming can be inappropriate for some areas or activities (for instance, longer-term investments in the business environment, efforts to prevent and treat malaria) and can even be counterproductive (for instance, addressing the spread of antibiotic resistant tuberculosis). The US needs foreign assistance tools that can take a sustained, long-term approach to long-term problems.

The Better Approach

There are important roles for both USAID and MCC within the US development architecture, a point I was pleased to hear Secretary of State nominee, Rex Tillerson, reflect in his confirmation hearing (saying MCC was “one of the most successful programs I've seen” and calling USAID “an important part of the projection of America's values around the world”). That said, there are a number of reforms to both USAID and MCC that would strengthen both agencies’ development effectiveness—and therefore their ability to support American interests.

• Expand the reach of MCC by:
  • Embracing subsequent compacts as the right way forward for MCC. With a limited number of new prospects for compact eligible countries, many of MCC’s current partners will remain the best choices for the agency in the future, even if they have already had one or more MCC partnerships.
  • Giving MCC concurrent compact authority to pilot regionally-focused investments in adjacent countries. Major constraints to growth in poor countries can be regional in nature; MCC has not been able to address these well because of its strict bilateral focus.
  • Creating a better candidate pool by adjusting the rules defining who can compete for MCC compacts. An improved candidate pool would allow for smoother transition out of candidacy and better reflect the significant poverty and development need in potential partner countries.
• Expand the proportion of US foreign assistance subject to aid-effectiveness principles. MCC’s entire set of standard practices is not necessarily appropriate for all US foreign assistance objectives and programs, but many of the things MCC employs can and should be applied to US foreign assistance more broadly, across sectors and initiatives. These include:
  • Expanded use of cost-benefit analysis;
  • Greater country leadership in priority-setting, program design, and implementation;
  • More and better quality evaluations;
  • Better use of evidence in program identification and design;
  • Increased transparency;
  • Expanded use of growth diagnostics for growth programming.

  USAID has made strong commitments and forward progress on almost all of these (see, for instance, the stronger emphasis on ownership in revised operational guidance, a commitment to do more growth diagnostics, a highly-regarded evaluation policy). However, it’s important to recognize that a shift in organizational culture won’t happen overnight. Continued efforts are needed—including getting the incentives in place for staff to work in new ways—to ensure meaningful implementation.

• Remove legal and policy obstacles that constrain USAID’s effectiveness. A complex web of spending directives—both congressional earmarks and presidential initiatives—seriously constrains USAID’s ability to adapt to changing priorities and make real progress adopting the type of aid-effectiveness principles described above. We have proposed a series of “Effectiveness Pilots” in which congressional directives and executive-imposed initiatives would be reduced or eliminated in a limited set of countries in exchange for greater adherence to the type of practices described above. This would give USAID the necessary flexibility to operate in ways associated with better and more sustainable results and lead the way for more fundamental, wide-reaching changes.