Understanding the Conditions under which Reform Promotion Tools are Most Effective: The Case of the Millennium Challenge Account
Researchers:
- Brad Parks
Partners:
Timeline:
2010-2012
Themes:
Incentives, Aid Effectiveness, Policy and Institutional Reform, Governance
Overview:
On March 14, 2002, President George W. Bush delivered a major speech at the Inter-American Development Bank, outlining his administration's approach towards international development policy and unveiling a new mechanism for channeling U.S. foreign assistance to developing countries called the Millennium Challenge Account (MCA). Bush argued that "[w]hen nations refuse to enact sound policies, progress against poverty is nearly impossible. In these situations, more aid money can actually be counterproductive, because it subsidizes bad policies, delays reform, and crowds out private investment." Calling for "a new compact ... defined by ... accountability for both rich and poor nations alike," he pledged a $5 billion annual increase in U.S development assistance and promised to establish "a set of clear and concrete and objective criteria" to "reward nations that root out corruption, respect human rights, and adhere to the rule of law... invest in better health care, better schools and broader immunization...[and] have more open markets and sustainable budget policies, nations where people can start and operate a small business without running the gauntlets of bureaucracy and bribery" (Office of the White House 2002). Two years later, a bipartisan coalition in the U.S. Congress authorized the creation of a new federal agency - the Millennium Challenge Corporation (MCC) - to administer the MCA. The U.S. government founded the MCA and the MCC on the principle that "sound development policies" provide a strong foundation for economic growth and poverty reduction. By law, MCC is required to choose partner countries based on their "demonstrated commitment" to good governance, social investment, and economic freedom. In order to measure a government's commitment to these policies and principles, MCC uses 17 quantitative indicators developed by independent third-party institutions and publishes easy-to-read "scorecards" for approximately 120 low income and lower-middle income countries. The transparent, merit- based structure of the MCA eligibility assessment was designed as both a reward and an incentive for governments to adopt policies that promote economic growth and poverty reduction.
MCC has now conducted seven rounds of its annual "country selection process" and there is little disagreement among scholars, policy analysts, and legislative overseers that it has rewarded developing countries with reasonably sound policies. Yet, MCC's impact as incentive for reform is much less well understood. A small body of mostly anecdotal evidence suggests that governments have implemented different types of legal, policy, institutional, and regulatory reforms to enhance their chances of becoming eligible for MCC assistance. However, academics, policy-makers, and development practitioners know relatively little about the strength and scope of MCC's "incentive effect" and why it seems to exert different levels of influence across countries and policy areas.
I plan to conduct the first independent evaluation of MCC's policy impact in the developing world, assessing whether and to what extent, how, and under what conditions the MCA eligibility standards have influenced the policy reform efforts of developing countries.
Research Question:
The purpose of this research project is to identify the conditions under which the MCC eligibility standards influence reform efforts in developing countries. I will assess effectiveness of MCC's "incentive effect" in three stages. First, I seek to explain cross-country variation in the degree to which governments undertake internal planning efforts to improve their performance on the MCC eligibility criteria (e.g. by establishing a high-level presidential task force or an inter-ministerial working group). Second, I seek to identify the conditions under which governments initiate specific reforms geared towards improving their performance on the MCC eligibility criteria. Third, I attempt to shed light on the conditions under which initial government reform efforts translate into successful episodes of reform implementation. I refer to these stages as "planning," "initiation," and "implementation." An important advantage of this multi-stage modeling approach is that it will allow me to conduct a novel form of "causal process tracing," which has traditionally been considered the exclusive province of qualitative researchers.
Theory and Hypotheses:
In order provide an account of why states respond to external financial incentives and moral suasion tools in different ways, I draw on insights from realist, liberal, and constructivist theories. However, I will also draw attention to a new theoretical approach that focuses on the causal significance of social networks. Six broad categories of competing and complementary hypotheses will receive empirical scrutiny in this study: (1) domestic political economy constraints and opportunities; (2) the degree to which the IO/donor and recipient government leaders share similar causal and principled beliefs regarding development policy; (3) the credibility of the IO/donor's commitment to reward compliance and sanction non-compliance; (4) the IO/donor's willingness and ability to "strengthen the hand" of domestic reformers; (5) the relative power of the recipient government vis-à-vis the IO/donor; and (6) and international policy diffusion effects.
Data Collection:
Using a novel qualitative coding scheme, I will create a new cross-country dataset on government reform efforts geared towards the MCC eligibility criteria. I will also code several key independent variables, including the credibility of MCC's commitment to reward compliance and sanction non-compliance, the level and quality of USG engagement, and the reform orientation of counterpart country's political leadership. The data for these variables will be drawn from media reports; official statements and documentation from MCC, USAID, the U.S. Department of State, non-USG donor agencies, international organizations, and candidate, threshold, and compact country governments; and my own direct observations as an MCC staff member between 2005 an 2010. These data will enable an analysis of the conditions under which MCC has informed, motivated, accelerated, sustained, or otherwise influenced reform efforts in developing countries. They will also be used to test the "construct validity" of a separate set of survey-based dependent variables.
Methodological Contributions:
I will explicitly address the confounding issue of "selection": that an unobserved factor - or set of factors - may influence a government's propensity to engage in MCA-related reform planning, adoption, and implementation activities. For example, consider the potential role of reform teams. The literature suggests that highly-skilled teams of experts who enjoy a high degree of political insulation, but who are also able to directly access key government decision-makers, often play a pivotal role in initiating and shepherding reforms to successful completion. Yet, it is difficult to measure the degree of political insulation and access enjoyed by these reform teams. My model will therefore need to account for an unobserved explanatory factor that could influence multiple stages (planning, initiation, and implementation) of the reform process.
I address the selection issue by empirically evaluating the extent to which the error term (i.e. the unexplained variance, or the difference between the predicted and observed outcomes) in the stage I model is correlated with the error term from the stage II model. If a significant correlation exists, it will provide an empirical basis for deriving selection-corrected estimates of MCC's policy impact at the reform initiation stage. Likewise, I will seek to develop selection-corrected estimates of MCC's impact at the reform implementation stage.
Policy Outreach:
After completing the empirical research phase of this project, I will work with Center for Global Development's Rethinking U.S. Foreign Assistance program to conduct targeted outreach to the policy community. This project will address several key policy issues facing the U.S. foreign assistance community, including: whether, to what extent, and how MCC should focus its energies on supporting and cultivating Western-trained and -socialized technocrats in developing countries; how MCC can best support US embassies and USAID missions seeking to engage and support reform-minded government officials in counterpart countries; how performance-based aid agencies can tamp down on "gaming" behavior; and how the MCC and other like-minded donor agencies can sharpen and widen the reach of their reform incentives and moral suasion tools. This study will also speak to the issue of why some reforms inspired by external incentives and socialization mechanisms result in de jure changes, while others lead to lasting, de facto changes.