U.S. DEPT OF STATE
28 March 2006
Millennium Challenge Group Signs Eighth Compact, Third of 2006
Aid agreement with Armenia calls for country to show more progress toward
democracy
By Kathryn McConnell
Washington File Staff Writer

Washington — The Millennium Challenge Corporation (MCC) March 27 signed its
eighth compact with a low-income country, committing more than $235 million
over five years to reduce poverty in rural Armenia.

The Armenian Millennium Challenge compact — or bilateral aid agreement —
is “affirmation of our confidence that Armenia will continue to enact the
institutional reforms that will support the effective use of our aid,”
including measures to protect electoral processes, John Danilovich, MCC
chief executive officer, said at a signing ceremony at the State Department.

However, Danilovich said, MCC will continue to monitor Armenia’s policy
reforms “throughout the life of the compact.”

Danilovich said that in April he would travel to Armenia with Jim Kolbe,
chairman of the House of Representatives Appropriations Subcommittee on
Foreign Operations and a supporter of the MCC. The two will meet with civil
society groups that will help monitor the use of Millennium Challenge
Account (MCA) funds so that benefits will go directly to the people the
Millennium Challenge projects were designed to help, Danilovich said.

MCC can withhold account payments if a recipient country fails to meet its
commitments to institute reforms, Danilovich said in a January letter to
Robert Kocharian, Armenia’s president.

CONCERNS ABOUT PAST ELECTORAL IRREGULARITIES

In December 2005, Danilovich wrote to Kocharian expressing concerns over
“irregularities” reported during a constitutional election the previous
month. (See related article.)

Parliamentary elections scheduled in 2007 and 2008, at which observers from
the Organization for Security and Cooperation in Europe (OSCE) will be
present, will be the “test” of progress in instituting “democratic
practices,” said Vartan Oskanian, Armenia’s minister of foreign affairs, at
the signing.

He said that just as economic development is a mechanism to foster
democratization, so too is democracy “a tool for further and deeper economic
development.”

“We know that corruption must not be tolerated and that law must rule,” and
that the principles of democracy must be “transformed to traditions of
democracy” in Armenia, he said.

INVESTING IN ARMENIA’S RURAL POPULATION

The Armenia compact consists of two investments to assist the portion of the
country’s population dependent on agriculture.

One investment will be targeted to improving the country’s rural roads so
residents will have access to health and other basic services and to markets
to sell their products.

Poor rural roads have kept Armenia’s farm-based residents from benefiting
from the increased foreign investment in the country — benefits that have
accrued mostly to residents of the capital, Yerevan, said Vartan Oskanian,
Armenia’s minister of foreign affairs.

The other investment is for an irrigation-and-drainage project that will
increase water supply to rural areas, and help farmers grow more high-value
crops and increase their yields, according to the MCC.

The Millennium Challenge Account compact is “the embodiment” of U.S.

“transformational democracy” because it will empower Armenian men and women
to better their own lives, to strengthen their own communities and to
transform their own future,” said Secretary of State Condoleezza Rice at the
signing. Rice serves as chairman of MCC’s board of directors. The MCC
administers MCA funds.

In the four years MCC has existed, it has awarded $1.5 billion to countries
that have demonstrated commitments to policy reforms.

In March 2005, slightly more than one year after MCC became operational; it
signed its first compact — with Madagascar. MCC signed four more compacts
in 2005 and so far has signed three compacts in 2006.

In addition, MCC has committed more than $100 million to help five
“threshold countries” develop compact proposals. These are countries that
demonstrate significant progress toward meeting the compact eligibility
criteria.

MCC uses 16 criteria to determine a country’s progress in the areas of
encouraging economic freedom, ruling justly and investing in people.

In 2006, MCC replaced the indicator of country credit rating with a new one,
the cost of starting a business, saying the latter measures policies that a
government can control.

MCC also is reviewing suggestions for a new indicator on natural resources
management, which is intended to ensure the environmental sustainability of
projects presented in compact proposals. (See related article.)
ELIGIBILITY CRITERIA
The MCC/MCA criteria are having an “incentive effect” on other low-income
countries wanting to become eligible for MCA funding by implementing new
reforms, according to the MCC.

MCC requires proposals to be developed through a comprehensive consultative
process involving all sectors of a country’s society, including
nongovernmental organizations (NGOs). (See related article.)
Compact recipients also have included NGOs in their MCC governing bodies
representing the beneficiaries of the program.

Even though many of the projects proposed by compact-eligible countries have
been in the agriculture and infrastructure sectors, MCC does not favor any
particular sector, but rather seeks proposals with a high rate of economic
return on investment and broad impact, according to MCC’s economic analysis
guidelines, updated in January.

The guidelines state that proposals must have “good supporting evidence”
that a project will be technically feasible and have “significant impact on
economic growth and poverty reduction.”

A transcript of the signing ceremony is available on the State Department
Web site.

For additional information, see the MCC Web site and Millennium Challenge
Account.

(The Washington File is a product of the Bureau of International Information
Programs, U.S. Department of State. Web site: )