US scheme rewards good governance with aid
By Guy Dinmore in Washington

FT
Published: June 3 2004

US aid experts are this week visiting 16 low-income countries selected
to receive aid as a reward for good governance in a multibillion
dollar programme that has won high praise for the Bush administration.

The administration has in effect created a new category of countries
eligible for US aid through the Millennium Challenge Account. It is
meant to be free from bias in allocating the money, $1bn this year
and $2.5bn (â^¬2bn, £1.4bn) requested from Congress for 2005.

Countries with a per capita income of less than $1,435 a year had to
meet performance-based criteria using publicly available indicators
in three fields, broadly defined as “ruling justly”, “encouraging
economic freedom” and “investing in people”.

Paul Applegarth, head of the Millennium Challenge Corporation,
which administers the fund, said the project was about “government
leadership”, adding that the 16 selected countries must now propose
their own projects and administer them.

“We are breaking new ground rules here with MCC,” he said. “MCC will
focus on sustainable growth through partnerships. Countries will set
their own priorities. Funding stops if performance slips. This is
not signing a blank cheque.”

The 16 countries named in May as eligible were: Armenia, Benin,
Bolivia, Cape Verde, Georgia, Ghana, Honduras, Lesotho, Madagascar,
Mali, Mongolia, Mozambique, Nicaragua, Senegal, Sri Lanka and
Vanuatu. A second tier of unnamed “threshold countries” was also
created, with $40m set aside to encourage those that nearly made it.

Steve Radelet, of the Centre for Global Development, a policy research
institute, said MCC “promises to be one of the most fundamental changes
in foreign aid in decades”. The Brookings Institution described it as
“visionary”.

The US will continue to give aid to countries such as Egypt
and Pakistan, which are important political allies but would not
necessarily make the “good governance” criteria. “We will still give
aid to our political friends, but separately, from a different pot
and making the distinction clear,” says Mr Radelet.

He noted that the 16 qualifying countries were all democracies. Three
countries that passed the necessary hurdles but failed to qualify –
Bhutan, Mauritania and Vietnam – were not. “Should democracy be a
criterion? That was a huge political debate,” he said.

The board showed some flexibility. Georgia did not pass the
“corruption” test but the MCC decided its new government had
demonstrated willingness to tackle the problem. This was not yet
reflected in the data.

Carol Graham, of the Brookings Institution, said it was increasingly
accepted wisdom that aid money was better spent in countries with
good governance.

But she was concerned “bad” countries would be left demoralised
and underfunded, and that USAID, the State Department agency that
oversees aid issues, would become marginalised. “How big will the
pot be with looming deficits, huge military expenditure and aid to
Iraq and Afghanistan? Who will fight for the budgets to sub-Saharan
countries?” she asked.