Can foreign aid be used to spur anticorruption reforms? Many donor agencies have tried. The typical approach is to make aid to a recipient country conditional on the adoption of a series of substantive anticorruption or good governance reforms. Unfortunately, there is little data to suggest conditional aid buys reform. To the contrary, grants of conditional aid have been associated with increases in corruption, slower policy reform, and the deterioration of governance generally. While one might expect that, all else equal, conditional aid would result in relatively more aid flowing to more honest governments, it seems the opposite is true: after controlling for a country’s poverty level, regime type, and other factors, it appears that more aid goes to more corrupt countries.

Twenty years ago, a small U.S. federal agency, the Millennium Challenge Corporation (MCC), took a different approach to spurring anticorruption reform through foreign aid. The MCC, which provides large ($100M+) grants to low-income countries, embraced a strategy that differed from traditional aid conditionality in two ways. First, rather than selecting aid recipients on an ad hoc, case-by-case basis, the MCC determines eligibility using a uniform scorecard. As relevant here, the MCC requires that, to become eligible for MCC grants, a country must score above an absolute level on the World Bank Institute’s “control of corruption” index. (Countries must also score above the median for their income class on ten of twenty additional indicators.) The MCC provides grants to most countries that do meet those criteria. (Of the 80 countries are eligible under this scheme, at least 50 have received funding.) Second, and relatedly, once countries are deemed eligible, no further conditions are attached to MCC funding, which can be directed towards any purpose and is rarely withdrawn. On average, countries receive $160M in unconditional funding, though grants have been as large as $698M.

At the time the MCC was created, this approach was labelled “crude and dogmatic.” Critics complained that the MCC approach would divert aid away from the countries in greatest need of both aid and reform, and towards countries that already outperformed their peers. But the evidence strongly suggests the MCC’s approach has spurred meaningful anticorruption reforms, at least among countries near its eligibility threshold. Researchers have compared countries are right above the threshold to others right below the threshold, and found that up to 38% of countries just below the threshold have implemented substantive anticorruption reforms as a result of MCC’s creation (see here and here). Analysis of statements and correspondence with officials from MCC candidate countries (from, for example, leaked embassy cables, meeting transcripts, and the like) provides corroborating evidence that countries near the threshold utilized the scorecard to galvanize reform.

Why has the MCC’s performance-based approach been more successful in catalyzing anticorruption reform than traditional conditional aid? It’s impossible to say for sure, but the research to date suggests a few intriguing hypotheses: Continue reading →