20 years of MCC: How big dreams faced tough realities

This article is part of an occasional series Devex is producing this year to examine the Millennium Challenge Corporation as it marks its 20th year. About 20 years ago, the United States government set out to find a new way to do development — one that would hold countries accountable for corruption and good governance — and as then-President George W. Bush said, it would be “linked to greater responsibility from developing nations.” The result was the creation of the Millennium Challenge Corporation in 2004. Built on the premise that aid dollars would do more good if they went to well-governed countries — not corrupt ones — the agency has invested nearly $17 billion in 47 countries in the 20 years since, aimed at improving economic growth. MCC estimates that its programs have helped 380 million people. “The early days were characterized by an atmosphere of entrepreneurship, big thinking, rapid changes in direction, and a positive and ambitious spirit in the organization, driven in part by a kind of confidence that things could be done better and some well-founded iconoclastic ideas about what had happened over the previous 50 years in international development,” a former government official told Devex. But over time, MCC has gradually become more like its peers in international development and even more like other government agencies, the official, who asked for anonymity to speak freely, added. The agency has become less flexible, as complex bureaucracy entrenches processes and lengthens timelines to get money out the door. MCC was envisioned initially as something larger and more transformative. It was set up to explicitly be different from USAID, the main aid agency of the U.S. government, a move that rankled some at USAID at the time. While the initial ambition was for MCC to become a $5 billion-a-year agency, and become a more dominant model of development, it has never achieved those lofty aims. Today, the agency’s budget is about $900 million annually and peaked at about $1.75 billion in 2007. Still, while it has faced challenges and adapted its development model built on selectivity, country partnership, and large grants to unlock economic growth, several experts and former MCC staff told Devex it has proven to be a success. “MCC didn’t fulfill our wildest dreams but I think it met our minimum expectations,” John Simon, who worked at MCC in the early years, told Devex. “I don’t think we were naive about that, we recognized this was a tough environment but I think the environment got even tougher than we anticipated,” Simon said. The early days In the early days, MCC was essentially a startup. It has since grown from National Security Council meetings and a small office in Rosslyn, Virginia, where some 10 employees worked, to about 300 employees today. Those days felt like “10 years in one. It was really intense,” Tim Docking, who joined the organization as the executive secretary for the front office as the early policies were being written in 2004. “People worked like dogs,” in the office late, flying to do deals or write them up, all while developing the processes the young agency needed. Early on, there was a lot of pressure to move quickly and get money out the door from countries, which won early grants, the White House, and from lawmakers. “You’re trying to work in a consultative manner on something that’s never been done before in countries that are resource-challenged and have a lot of issues,” he said, adding that it was challenging in the early days to create processes as they went. In many ways, the agency was reflective of the time in which it was created. “MCC was sort of stood up to be the response to 9/11 from the development community at the time,” Docking said. “There was a bit of gloating going on around the senior management table about [how] we don’t want to be like USAID. We weren’t set up to be like USAID, we were set up to be different.” Over time, though, MCC recognized it needed that agency’s expertise, he said. MCC’s ambitions and the creation of a new aid agency rubbed some people the wrong way, particularly at USAID, whose leadership felt it should have received the funding allocated to MCC or it should have been a division within the agency. MCC’s first CEO Paul Applegarth and the USAID administrator butted heads, several sources told Devex. Those challenges resolved somewhat, in part after Applegarth, who sources described as a somewhat divisive figure, resigned abruptly in 2005, in part due to concerns about whether the agency was delivering fast enough. Applegarth had lofty expectations that MCC could “solve all the major problems of the countries it partnered with, that compacts would be $1 billion each, and would shock the economies of countries so they would move up in development,” a different former senior government official told Devex. But many countries couldn’t absorb that much capital and time would show that one compact, or large grant, would rarely tackle all the barriers to economic growth problems in a country. In those early years, though, MCC had considerable goodwill — and political cover — from the White House and U.S. Congress. But over time, the agency, which had more ability to make more of its own decisions, has been pulled in different directions by some of its stakeholders. The model As the agency grew, it refined its model — it would use a set of criteria to identify how well a country was governed and then work with the administration to develop five-year grant agreements to tackle economic growth constraints that would be implemented by a local entity set up for that purpose. One of the first things MCC had to figure out was how exactly it would evaluate countries, and what emerged was MCC’s scorecard, now a set of 20 policy indicators — including control of corruption, political rights, civil liberties, fiscal policy, health spending, vaccination rates, employment opportunity, gender, and land rights — that is used to evaluate low- and lower-middle income countries. If enough of the criteria are met, they become eligible for a large grant — potentially hundreds of millions of dollars. The initial process to create the scorecard was led by a U.S. Treasury Department official and resulted in a system that uses third-party, transparent independent data. A country would, and still does, have to meet at least half of the indicators to qualify for funding, along with three hard hurdles. That first hard hurdle — that had to be met regardless of what other benchmarks a country would achieve — was the corruption indicator, and that was driven by Bush, according to Simon, who worked on the early scorecard. “The whole raison d’etre of MCC was to give money where it would be effective and the president’s point of view was that corruption was sort of the original sin of ineffectiveness,” he told Devex. It was a “no brainer” that if a country wasn’t in the top half of countries on the corruption indicator the agency would not give it funding, Simon added. Over time, additional hard hurdles were added around political rights and civil liberties, to ensure that funding was given to democracies. That model, requiring countries to meet their criteria or be denied funding, is unusual in development, and it is a core part of what defines MCC. The agency has stayed true to the model over the years. So much so, that about 25% of grant agreements have been canceled as countries failed to meet policy requirements, going through coups or backsliding on the scorecard requirements. The agency takes some pride in this statistic — it’s proof that it puts its money where its mouth is. Backslide on democracy? Funding withdrawn. Failure to follow through on policy commitments? Give back the money. In Ghana, for example, MCC planned a large-scale energy grant that would focus on transmission lines. It included a commitment from General Electric to invest in additional energy generation, some of which was tied to a requirement that the government would privatize the state-owned utility company. When the nation’s political winds changed and the new government failed to make the policy changes, MCC took back nearly $200 million of the grant and GE withdrew its plans. In 2009, MCC canceled its Madagascar compact due to a coup, the grant to Malawi was suspended in 2012 because of undemocratic activity, and in 2022 MCC terminated assistance to Burkina Faso after a coup. “They should hang their hat on that. That shows there’s accountability, that it’s not just window dressing but that MCC is willing to pull the plug when conditions aren’t met,” Docking said. Challenges MCC’s initial bold idea was a bit “naive,” said Mahmoud Bah, who worked at MCC for 13 years before leaving in 2023. Bah served in several posts, including as acting CEO. The challenges are quite complex in many of these countries and fixing them in five years was not realistic, Bah said. While tackling economic constraints to unleash growth worked well on paper, that didn’t translate to reality, he added. MCC quickly realized that one compact was often not enough, so over the years it has evolved to provide second compacts in many countries and is now pursuing regional compacts to address broader constraints, Bah said. Several former MCC staff members talked about the pressure of the early years to perform and get money out the door quickly, something that proved difficult. It was a huge process to develop a compact, and the slow pace of getting funds out to countries limited the agency’s ability to meet its potential, Simon said. To hit the original target of $5 billion a year the agency would have “needed to show a lot more traction on the uptake.” The early legal team and general counsel made rather complex and lengthy contractual agreements that slowed the deal-making and limited the agency’s ability to start quickly. That brought additional scrutiny, Docking said. But the lack of growth wasn’t just because of the lawyers’ requirements; the reality was that individual countries could only absorb so much capital if they wanted to spend it effectively, he added. Another factor that “undermined” MCC was the increase in funding from China, which was often counterproductive to development and didn’t carry the same rule of law requirements, so the incentive to meet MCC’s policy requirements was diminished, Simon said. Competition with China has also complicated MCC’s job in other ways. Sri Lanka rejected a grant from MCC after several years of development when a government that was friendlier to China took power. The new government argued that the MCC grant would undermine Sri Lanka’s sovereignty. And in Nepal, the grant compact was in limbo for years as it was debated in Nepalese politics and society, with Chinese disinformation campaigns influencing the discussion. The political environment globally, and in many potential MCC countries, has also become more difficult, particularly with increasing forces of instability and recent democratic backsliding globally, but especially in the low- and lower-middle-income countries where MCC operates, Simon said. Those factors make MCC’s job harder and mean fewer countries qualify. Another factor that kept MCC from realizing its potential is that other development programs didn’t replicate the model, Simon said. “It didn’t become as much of the standard of how to do development as we hoped, even though no one now disputes that it’s a good way to do development,” he said. MCC must also answer to various stakeholders who influence the agency — from lawmakers to cabinet members — and they often have different ideas for what they want the agency to accomplish. More clarity from those with influence or the independence to make decisions could improve the agency, the former government official told Devex. “As it stands now, different forces tug MCC in different directions and make it hard for MCC to optimize its business model to have as much impact as it could,” the official said. Those forces include foreign policy considerations, a focus on climate, or specific geographies, whether it should take big risks or be very cautious with taxpayer dollars, and whether it should be a learning organization. “These sorts of things influence how the organization thinks about itself and that list is long enough that it’s hard enough for them to simplify and focus,” the official said. While those forces have always been at play, in the early years MCC could make more of its own decisions, in part because it had powerful protectors and advocates, but that has shifted. What’s worked MCC has shown itself to be a model for country-driven, large-scale economic development programs, many of which have focused on energy, water, infrastructure such as roads, agriculture, and more. The agency’s programs have trained more than 450,000 farmers, upgraded or built nearly 7,000 kilometers of electricity lines, supported the adoption of 135 legal and regulatory reforms related to land, built about 4,000 kilometers of roads, and constructed 32,000 sanitation facilities. Agency staff have access to the highest levels of leadership in a country and such access — to presidents, prime ministers, and other government ministers — makes it easier to talk about institutional reform. Countries like the approach because they have ownership over the projects with local entities managing the grants and developing local capacity. The prospect of that large grant can also push countries to make important policy changes to qualify for funding or as part of the grant agreements. MCC has a strong record of impact measurement and transparency, one that more aid organizations and development finance institutions should replicate, said Nancy Lee, a senior policy fellow at the Center for Global Development, who worked at MCC for several years. MCC does many impact evaluations and publishes projected rates of return before the launch of a project and the actual rate of return after a project is completed, she explained. “I’ve been in development for 20 years and I have never seen an agency collaborate the way MCC does — bringing people to get their opinion, workshopping ideas, and having buy-in from the bottom up,” Bah said. Stay tuned for the next article in this series, which looks at how MCC can change and improve in the years ahead.