Why the Middle East and North Africa Incentive Fund Won’t Make a Difference

On Monday, the Obama administration released its proposed budget for Fiscal Year 2013, which starts on 1 October 2012. Among the many tidbits buried in that document is a proposal to establish a new Middle East and North Africa (MENA) Incentive Fund, to be managed by the Department of State and the U.S. Agency for International Development (USAID). According to a State Dept. press release, the point of this new $770-million fund would be “to better position the United States to quickly respond to dramatic changes in the region and incentivize reforms.” More specifically, the MENA fund is intended to “incentivize [gack, I hate that word] long-term economic, political and trade reforms—key pillars of stability—by supporting governments that demonstrate a commitment to undergo meaningful change and empower their people.”

On its face, this fund strikes me as smart policy. Since the 1980s, the U.S. government’s efforts to promote democracy abroad have relied heavily on negative incentives–sticks rather than carrots. Democratic and Republican administrations alike have routinely sought to jawbone recalcitrant autocrats into adopting political and economic reforms and funded training for those autocrats’ domestic challengers.

As I’ve argued elsewhere on this blog, I don’t think these hostile approaches are very effective, and they may even be counterproductive. The appearance of an alliance between foreign powers and domestic opposition groups may goad authoritarian rulers into cracking down before that opposition grows powerful enough to pose a serious threat, and it can enhance domestic support for that crackdown by playing on nationalist concerns about foreign meddling. Foreign funding for “civil society” organizations and training  also draws local activists’ energy away from the difficult but crucial work of domestic organizing into the cyclical hunt for overseas grants and attention.

These problems haven’t stopped Western governments from trying, but they also haven’t stopped American policymakers from experimenting with positive incentives, or carrots, too. The single-biggest experiment along these lines is the Millennium Challenge Corporation, created on George W. Bush’s watch, but the proposal of this new MENA fund shows that interest in positive incentives was not unique to that administration.

The more I think about it, though, the more I doubt this MENA fund would have any effect on the odds that regimes in that region will attempt or sustain democracy. I see three major problems.

First, the proposed fund is awfully small. Even if it’s spread across just a handful of the many countries in the region, the proposed budget of $770 million would still represent no more than a few hundred million dollars per country. That’s not a whole lot of incentive to undertake or sustain reforms that will often have powerful domestic enemies in countries as large as Egypt, Jordan, and Tunisia. To have much impact on those governments’ behavior, the fund would have to be big enough to make a real dent in the expected costs of democratization–and, equally important, to bear some resemblance to the expected rewards of sustaining or restoring authoritarian rule.

Second and related, the benefits of that assistance aren’t properly targeted. Specifically, the benefits of the foreign assistance the MENA Fund could offer would be public, while the benefits of sustaining or restoring authoritarian rule are often private, or at least spread across a much smaller pool of beneficiaries. Enticements work by motivating someone to do something. When it comes to political and economic reforms, the “someone” isn’t a country or its population; instead, it’s the small group of elite insiders who control–and benefit most from–the current institutional arrangements. Asking them to destroy those arrangements in exchange for new foreign assistance is kind of like offering a reward for tips leading to the capture of a local crime boss but insisting that the informants share the reward with everyone in the neighborhood. Stacked against the material benefits of keeping the old order going and the risks of ratting out the boss, one’s personal share of the public gain starts to look pretty meager.

Third, there are too many alternatives. Conditional rewards don’t work very well when the targets can get the same benefits somewhere else without the hassle of meeting the conditions. If the U.S. and the were the only source of badly needed foreign financing and assistance, conditional assistance might be more effective. In today’s world, though, governments in need of cash can often shop around for a better deal–from China, from Russia, from the Gulf monarchies, from regional development banks, from wealthy private investors, and so on. The availability of unconditional alternatives further dilutes the drawing power of these already-modest enticements.

If it gets established, the Incentive Fund will add some programs to the roster of U.S. activities in MENA countries “in transition,” and some of those transitions might succeed in producing durable democracies. My guess, though, is that the countries receiving this new assistance will be the ones that would have undertaken the relevant reforms anyway. The Incentive Fund will not transform any dictators into democrats, nor will it have a significant effect on the odds that new democracies in the region will survive.

Strong Evidence that Donors Use Development Assistance to (Try to) Influence Elections

Researchers have scrutinized foreign aid’s effects on poverty and growth, but anecdotal evidence suggests that donors often use aid for other ends. We test whether donors use bilateral aid to influence elections in developing countries. We find that recipient country administrations closely aligned with a donor receive more aid during election years, while those less aligned receive less. Consistent with our interpretation, this effect holds only in competitive elections, is absent in U.S. aid flows to non-government entities, and is driven by bilateral alignment rather than incumbent characteristics.

That’s the abstract from an important new paper by UC-San Diego economists Michael Faye and Paul Niehaus, forthcoming in American Economic Review. Technically, official development aid (ODA) is supposed to be about promoting economic development and improving popular welfare. Nevertheless, Faye and Niehaus show a strong link between election cycles and aid flows that fits what we would expect if aid were also being used for political ends. In cases where elections are competitive, donors crank up the aid to friendly governments facing tough elections while reducing aid to hostile ones. In cases where elections aren’t competitive, aid flows don’t vary much around elections (why bother, right?). Meanwhile, assistance to non-governmental organizations and opposition groups from the U.S.’s National Endowment for Democracy (NED) follows the same cycles, but the pattern is reversed (albeit not statistically significant): assistance to opposition groups goes down around election time in countries with friendlier governments, and it goes up around election time in countries with more hostile governments.

All in all, it’s a pretty compelling set of results that should put another big dent in the “development aid isn’t political” narrative.

Thanks to NYU’s Cyrus Samii for pointing this paper out on Twitter.

Raising the Human-Rights Bar for Development Assistance…But Will It Make a Difference?

The U.S.’s Millennium Challenge Corporation (MCC) has raised the bar for countries seeking its development-assistance grants in 2012 by adopting stricter standards for civil liberties and political rights. The intentions behind this change are clear and laudable, but larger weaknesses in the MCC program and the increased availability of unconditional aid from other sources lead me to expect that this change’s impact on political development in the targeted countries will be negligible.

For readers who aren’t aid wonks, some background is in order. The MCC is a U.S. government-funded but independently managed aid agency that aims to help its recipients reduce poverty by funding programs that are meant to boost economic growth. The MCC was established by President Bush in 2004, but it was the brain child of Stanford international-relations professor Stephen Krasner, who went on to serve as director of the State Department’s Policy Planning Staff for part of Bush’s second term.

The big idea behind the MCC was to give poor countries stronger incentive to improve their economic and political governance by making a big, new pot of aid funding available, but making access to that pot conditional on countries’ performance on a basket of governance indicators. In theory, it’s like setting up a smoothie bar  in a high-school cafeteria and then telling the hungry students they’ll get free smoothies, but only if they’ve done well enough on their report cards. If they’re hungry enough (and like smoothies enough), anticipation of that reward should encourage them to improve their schoolwork, and everyone ends up better off for it.

To be eligible for MCC grants, countries a) have to be relatively poor (“low income” or “low middle income” in World Bank parlance, meaning they have an annual gross national income per capita less than $3,975); and b) have to satisfy a battery of selection criteria across three thematic groups: “economic freedom,” “investing in people,” and “ruling justly.” The MCC spells out its criteria in painstaking detail in an annual report, identifies candidate countries based on income, issues “report cards” on those countries’ governance practices, and then, finally, announces which countries have qualified for its assistance.

The big change announced by the MCC in 2011 for fiscal-year 2012 comes in the way it handles the “ruling justly” category. In the past, countries could qualify by scoring above the median on “controlling corruption” and any two of the five other indicators in that bin: political rights, civil liberties, voice and accountability, government effectiveness, and rule of law. Starting in fiscal-year 2012, however, countries have to score above a threshold on two of those six “ruling justly” indicators: still “controlling corruption,” but now either “political rights” and “civil liberties” as well.

This change is potentially significant. Of the six “ruling justly” indicators, only three are directly indicative of democratization: political rights, civil liberties, and voice and accountability. This meant that, under the old rules, highly undemocratic countries could qualify for MCC grants, as long as they were well administered relative to their low-income peers. Under the new rules, however, countries have to be at least moderately liberalized or democratized to get through the door. (For those of you who are familiar with the Freedom House political rights and civil liberties indices used to measure these dimensions, the minima for 2012 are 4s on both scales.)

To see what this rule change might mean in the real world, I poked around the MCC’s data in search of countries that would have cleared the “ruling justly” hurdle under the old system but fall short under the new one. Instead of trying to determine overall eligibility, which is pretty complicated and sometimes involves additional considerations, I just looked at the “ruling justly” category. This unofficial and possibly error-prone exercise identified the following four countries as ones that would have made the old cut but fail to make the new one:

  • Djibouti
  • Ethiopia
  • Rwanda
  • Vietnam

That list nicely reflects the intentions behind the 2012 rule change. I know little about Djibouti, but Rwanda and Vietnam readily spring to mind as countries that often get lauded for their technocratic performance in spite of their clear failings on human rights and democracy. I would have guessed Ethiopia was more of a mixed bag, but it just barely tops the peer-group thresholds for “control of corruption” and “rule of law” while easily clearing the bar on “government effectiveness.”

Of course, the big question is whether or not MCC’s scoring change will actually help motivate the governments of those four countries to initiate political reforms they otherwise would not have taken. On that count, I’m hopeful but pessimistic. Seven years after its creation, the MCC isn’t having the transformative effects its designers intended, and that pattern isn’t likely to change any time soon.

The basic problem is that the MCC’s pot of money is too small to have the kind of “transformative” effect on the vast political economy of aid that its creators intended.  In part, that’s a function of supply. As originally envisioned, the MCC’s Millennium Challenge Account was supposed to have an annual budget of $5 billion. In fact, the budget has hovered closer to $1 billion per year, thanks to smaller requests from the presidents and smaller allocations from Congress. Given the current state of the federal government’s finances and the domestic politics of foreign aid, it’s hard to imagine that budget growing much larger in the next several years.

Budget woes aside, any transformative effect the MCC might have is also impeded by limited demand. Poor countries seeking development assistance have other options, and most of those other options don’t come with political strings attached. Faced with the choice between adopting political reforms that might threaten their grip on power in order to pursue a modest-sized grant from the MCC or seeking assistance elsewhere, it’s hard to imagine many authoritarian rulers opting for the former. In the 1990s and early 2000s, when the U.S. and Europe were pretty much the only game in town for development assistance, the MCC’s conditional offers might have been more tempting. In recent years, though, rapid growth in foreign assistance from China in particular has expanded the pool of available funds, thereby diluting the power of the MCC’s medicine.

In sum, while I applaud the MCC for making this change, I doubt it will make much difference. They’re trying to do the right thing, but it’s hard to move the world with a short lever and a shaky fulcrum.

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