New system begins rerouting U.S. aid for poor countries

By CHRISTOPHER MARQUIS, The New York Times

WASHINGTON, Feb. 22, 2004 — The United States is now plunging into a fundamental overhaul of its assistance to developing nations, demanding that applicants for a rich new source of financing prove their worthiness. Already, countries from Bolivia to Bangladesh are competing to be among the winners.

This month, the board of the new Millennium Challenge Account met for the first time to lay the groundwork for grants that President Bush has promised will total $5 billion annually by 2008. In the first year, perhaps just 15 nations will win awards.

The program is ambitious. If fully financed, the Millennium Challenge Account would reflect close to a doubling of the American aid that goes primarily to promote development in poor countries, analysts say. It would represent an overall increase in foreign aid of nearly 9 percent.

But the new account is already altering traditional aid flows. All but five countries in Latin America, for example, are ineligible for the Millennium Challenge because their per capita incomes are too high.

At the same time, because of cuts proposed in overall foreign aid to the region, some of these nations, like El Salvador and the Dominican Republic, could experience reductions of 10 percent in development aid in the fiscal year 2005, which begins Oct. 1.

African countries like Senegal and Ghana that respect civil liberties stand to benefit under the new program, according to budget analysts; the war-ravaged nations of Sudan and Somalia, however, do not.

The new account, like a second new program, the president’s five-year, $15 billion global effort to fight AIDS, is up against foreign aid spending constrained by tight budgets and unusually heavy outlays on assistance to Iraq and Afghanistan.

Critics of the Millennium Challenge Account are warning that it may produce inequities, handsomely rewarding a handful of nations while leaving some of the most economically needy countries to vie for much smaller amounts of traditional aid.

Advocates say the two initiatives are prototypes in a broad administration effort to retool the foreign aid system, which spends nearly $18 billion a year on projects ranging from feeding programs to state-to-state economic support.

Representative Henry J. Hyde, the Illinois Republican who is the chairman of the International Relations Committee and an important backer of the new approach, wants to place a performance-driven Republican imprint on such aid, which, until recently, was denounced by some of his colleagues as “pouring money down a rat hole.”

That kind of Congressional distaste for foreign aid, which traditionally suffered in favor of spending on domestic programs, has eased greatly since the Sept. 11 terrorist attacks, which highlighted the dangers posed by weak and neglected states, Mr. Hyde’s aides said.

“For too long, U.S. foreign assistance programs have been adrift without an overall strategy, and without reasonable standards of accountability,” Mr. Hyde said. The Millennium Challenge Account and the AIDS fund can serve as models for future reforms in foreign aid, he said.

“How we broaden these efforts to include more of our foreign aid programs will be an important legislative challenge of the coming months and years,” he added.

But some advocates for development and relief agencies accuse the administration of turning its back on some of the neediest countries to pay for the new strategy.

Mary E. McClymont, the chief executive officer of InterAction, the largest alliance of American-based relief groups like CARE and Save the Children, said the administration, in its new budget proposal, had cut $400 million from traditional aid and development accounts – including money for child survival and family planning – to defray its new costs.

“The administration’s budget is robbing Peter to pay Paul,” she said. “The Millennium Challenge Account will fund select, top-performing countries. That is good. But what about all the other poorer, weaker countries that could become failed states?”

Administration officials contend that they have not raided the budget to pay for the new programs. Indeed, Andrew S. Natsios, the administrator of the Agency for International Development, said in an interview that his budget had nearly doubled, to $14.2 billion, since 2001. But much of that increase reflects rebuilding in Afghanistan and Iraq.

Mr. Natsios said the agency, a popular target of cost-cutting Republicans in the 1990’s, had found a new purpose in preparing second-tier candidates to qualify for the Millennium Challenge fund. At the same time, he said, A.I.D. will not abandon its traditional support for failing states, but it will be more realistic in its expectations.

“Anybody who expects us to put Somalia back together again – acting alone – is foolish,” he said.

The Bush administration has identified 63 countries that would be eligible to compete for the first round of of Millennium Challenge funds because their per capita income levels are below $1,415 and they are not precluded from receiving aid by being on the State Department’s list of terrorism sponsors.

To qualify for the funds, countries must demonstrate, in the president’s words, that they are “ruling justly, investing in their people, and establishing economic freedom.”

The administration will use 16 independent indicators, many of them from outside government, to measure the merits of a candidate.

For example, a private organization like Transparency International could rate the applicants on corruption; the World Bank Institute, on rule of law; Freedom House, on political rights; and the Heritage Foundation, on trade policy.

“It’s pretty rigorous,” said Alan P. Larson, the State Department’s top economics official, who is running the account until the president’s expected nominee, Paul Applegarth, is confirmed. Mr. Larson noted that the board would use indexes that were publicly available.

Another innovation with the new program is that the United States will not dictate how money is spent.

“This would put the recipient countries much more in the driver’s seat,” said Steven Radelet, a former Treasury official who works at the Center for Global Development. Countries would sign three-year contracts with the United States, and the effectiveness of their efforts would be judged by the results.

Some development specialists worry that the process may diminish accountability.

“You’re putting a lot of faith in these countries to figure out how to use this money well,” said Thomas Carothers, senior associate at the Carnegie Endowment for International Peace.

Mr. Bush’s AIDS initiative seeks to unite a mix of agencies and programs under a single coordinator, Randall L. Tobias, who will present his emergency plan on Monday.

Mr. Tobias, a former pharmaceutical executive, is expected to outline plans for a rapid expansion of programs in about 15 seriously afflicted countries, emphasizing prevention, care and treatment and spending $10 billion in new financing over five years for a total of $15 billion.

While the financing is welcomed by advocates for people with AIDS, critics have questioned whether a separate bureaucracy is necessary when there is already a Global Fund to Fight AIDS, Tuberculosis and Malaria.

The administration, which has asked for $2.8 billion for the AIDS fund for 2005, says it is gearing up to meet the president’s goal of $15 billion over five years, though some Congressional Republicans concede that budget deficit concerns will probably scale back both initiatives.

Some political analysts question whether the United States’ commitment will endure beyond the November elections and the current spending spree on antiterrorist strategies.

“It remains to be seen whether this is an innovation that has staying power,” said J. Brian Atwood, the A.I.D. administrator in the Clinton administration.