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January 10, 2006
The Armenia Decision: The Carrot that Should Have Been the Stick
Posted by Sheila Herrling at 12:07 PM
On December 19th, the MCC Board approved a $235 million compact with Armenia. Seeing as how the government of Armenia didn't take very seriously the advice offered by the MCC in September or the concerns expressed by Freedom House and Open Democracy, the approval came with a stern warning from CEO Danilovich:
“MCC is concerned about the government's lack of transparency and commitment to open and fair elections in the recent referendum. I have expressed those concerns to President Kocharyan and look forward to working with the government to protect Armenians' ability to participate fully in the electoral process. MCC was designed to reward and work with nations that take the hard steps necessary to create a policy framework to spur economic growth and reduce poverty. Consequently, Armenia's continued participation in the Millennium Challenge Program depends on its good performance in ruling justly, investing in people, and encouraging economic freedom. MCC will continue to monitor Armenia's policy performance in these three categories throughout the life of the Compact.”
The use of the carrot vs. the stick has always been a dilemma in foreign aid. The optimist in me had great hopes that one sign of the MCC's innovative model would be its ability to say no -- to demand measurable performance before approval, instead of approving on the hopes that performance will be addressed later (and, fingers-crossed, before the first significant disbursement). This modus operandi is old-school foreign aid. At a minimum, the measures laid out by the MCC to demonstrate Armenia's commitment to addressing slippages could have been time-bound and measurable. Better still, the MCC could have said, "show me the commitment before we show you the money."
So, why the carrot vs. the stick? Some folks say the MCC was under pressure to approve more compacts to show Congress they are truly operational. Some folks say it was political pressure to support a strategic ally. Some folks say Armenia really does have an innovative poverty reduction and growth strategy worthy of incentivizing. And some folks say there is still time for tough love from the MCC in terms of withholding disbursements if there is no progress on the measures they laid out. I would love to hear what you all are thinking...how you reacted...and whether you think there is still scope for tough love.
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Comments
I think that the main reason we see MCC approving the Armenia compact is, as you said, political pressure from Congress. Hyde's comment in the April hearing ("I would prefer that Congress be under pressure to catch up and fund a success, than need to justify funding for a potential one.") hit home at the MCC, and PR throughout November and December mentioned three new compacts expected in the future (Armenia, Vanuatu, and one more).
Given funding constraints ($1.77 billion rather than $3 billion for FY2006), the tradeoff between more, smaller compacts or fewer, larger compacts is now a real issue. I think MCC hopes to demonstrate success with a greater number of smaller compacts. They are under pressure from Congress to demonstrate success, and for that reason were willing to look past fraud in November's constitutional referendum and approve a compact with Armenia.
Posted by: Adam Gardner at January 12, 2006 01:08 PM
To me it's just one more worrying sign that the MCC is falling into the old foreign aid habits -- which of course were created by some of the very same reasons (politics, pressure to push money out the door, hopes that a little money will sway recalcitrants, etc.). Unfortunately, there seems little reason to think the MCC will not meet a similar fate. The original concept of the MCA is still a beautiful idea - so maybe there's still time to go back to that vision. And, really, why does a small number of large programs have to be a bad thing?
Posted by: Todd Moss at January 13, 2006 05:11 PM
Great post, Sheila. You put your finger on a crucial challenge for the MCA and offer several plausible reasons for them approving the Armenia compact. It would be great if somebody from the MCA reading this blog could shed light on their reasoning! Failing that, have you learned anything more since your post about why they decided to offer the carrot now?
Posted by: Lawrence MacDonald at January 15, 2006 12:27 AM
In addition to your reasoning, what bothers me about the modus operandi of the MCC compacts is the "getting a little pregnant" problem. For example, if a major compact expenditure is a large road building effort - ala georgia - or a port development what happens in, say, year two or three when the road and/or port are half complete and then the MCC decides that it can no longer support a country. (It might be that corruption explodes or there is a coup or they elect a hugo chavez type). What happens then? Is the road and port left half completed with the risk that it not be completed and the investment waisted? An alternative to be considered in some cases might be the sector grants that USAID used in the past. In those cases if commitments are not met then the next year's budget injection can be withheld. Another alternative would be to channel a healthy portion of the funds to NGOs who are well established in the country and can demonstrate success not only in their projects but in turning management over to local staff. It seems that, in any case, once expenditures begin, it will be difficult to stop them until the promised funds are spent; all the more reason to apply the stick before the carrot.
Posted by: ron bobel at January 23, 2006 10:16 AM