Editor: Marianna posted this on the Azerbaijan blog. Due to the post’s regional significance, it is also posted here.
By Marianna Gurtovnik

BACKGROUND

Over the past decade, US policymakers have been questioning the effectiveness of America’s multi-billion foreign aid programs. In some cases, these programs created dependency on aid in developing nations or allowed for funds’ mismanagement by corrupt governments. To address these concerns, George W. Bush launched the “Millennium Challenge Account� (MCA), an initiative that makes good governance a precondition for America’s assistance to poor countries. In January 2004, after the initiative had received bipartisan endorsement in the Congress, President Bush established the Millennium Challenge Corporation (MCC) to pioneer the policy.

US foreign aid has been instrumental in promoting American interests worldwide, and South Caucasus is a case in point. Since the mid–1990s, United States have been among the largest donors of humanitarian and developmental projects serving refugees and other under-privileged groups in the South Caucasus. With time, the US have also reaped substantial geostrategic pay-offs in the region. Azerbaijan, Armenia, and Georgia aspire to join NATO and have participated in the bloc’s military training program. They’ve also deployed peacekeeping battalions in either Iraq or Afghanistan, or both. After years of sticky negotiations, Russia has promised to withdraw all troops from its military bases in Georgia by 2008. Russia has already closed down two of its four bases in Georgia. And last May, the British Petroleum-led oil consortium launched a long-delayed pipeline to pump Azerbaijan’s “black gold� over to the US and European markets. Financial feasibility of the $3.7 billion pipeline was questioned even by western economists. However, its route through Georgia and Turkey made sense to western diplomats because it circumvented volatile and unpredictable Russia.

Eager to expand the cooperation, the US have insisted that Armenia, Azerbaijan, and Georgia improve their record on just governance and economic freedom. Vote-rigging, corrupt courts, muzzling of political dissenters, and pervasive red-tape have bred public discontent and stifled private sector’s growth in all three countries. Last November, US officials chided Armenia and Azerbaijan for falsifying the results of the referendum and parliamentary elections, respectively. The new Georgian government that emerged after the ‘Rose Revolution’ of November 2003 enjoys a clear support of the Bush Administration, although it, too, is plagued by human rights violations.

One may now wonder if each of the South Caucasus countries’ governance practices have been reflected in MCC’s recent funding decisions. The answer is not a clear “yes�.

All three countries have a per-capita income of up to $1,435—low enough to be considered poor, under MCC rules. But the agency does not base its decisions on income alone. To qualify for MCC funding, a country must score above the median on the corruption indicator. It must also score above the median on at least half of indicators in three categories: rule of law, investment in people, and economic freedom.

Georgia: Long Way Cut Short

In September 2005, MCC signed a 295.3 million Compact (agreement) with Georgia—the second largest grant the corporation has signed so far. Secretary of State and MCC Board Chair, Condoleezza Rice, who attended the signing ceremony in New York, praised the Georgian Government’s “commitment to political and economic reform�.

Unlike traditional foreign aid where a donor country sets the priorities, MCC encourages governments to identify projects and prepare grant proposals themselves. MCC’s key principle is to “reduce poverty through economic growth�. Georgians will use the Compact money to repair a gas pipeline and prop up small rural businesses. MCC’s additional grant of $4.1 million will finance road rehabilitation in Samtskhe–Javakheti province, home to Georgia’s largely impoverished Armenian community. It is hoped that better roads will halt economic isolation of Armenian farmers by facilitating the delivery of their produce to Georgian markets.

The Compact was signed despite the fact that Georgian government has failed the tests on corruption, rule of law, and the quality of economic regulatory policies. Georgia’s ranking on primary education spending relative to other candidate countries (8%) is also way lower than that of Armenia (50%) and Azerbaijan (60%). Many rural schools in Georgia lack funds to upgrade their dilapidated facilities and infrastructure. Education for ages 6 to 16 is officially free but the US State Department’s human rights report for 2004 points to “endemic bribery� in Georgian public schools where parents are charged informal fees to cover maintenance costs, school supplies, and even teachers’ delayed salaries. “In some cases, students were forced to drop out due to an inability or unwillingness to pay�, the report notes.

In 2005, Transparency International ranked Georgia 130th out of 158 countries surveyed for its “Corruption Perception Index�—a progress by 0.3 points compared to Georgia’s standing in 2004. Georgian parliament took steps to combat corruption by adopting amendments to the Criminal Code in February 2004, and passing the Code of Conduct in October 2004. New criminal legislation has expanded the Prosecutor Office’s authority to charge officials with bribery, eliminated immunity for law enforcement officials, and allowed in-absentia trials for officials who failed to report to court. The Code of Conduct has established ethical norms for parliamentarians.

Armenia: A Semblance of Scrutiny?

The $235.65 million Compact with Armenia for irrigation and rural road rehabilitation was approved in December 2005. Armenian National Committee of America (ANCA) reports that Armenian government will match MCC funds to rebuild over 1/3 of the Lifeline Road Network—a route through which Armenia hopes to link to Nagorno-Karabakh. Armenian–dominated Nagorno-Karabakh province broke away from Azerbaijan in 1988 but hasn’t been internationally recognized as a legal entity.

According to MCC, Armenia has made a strong showing on economic policies where its percentage rankings, relative to other candidate countries, vary from 83 to 99. It has scored below median on political rights and health and education spending.

Rated 88th out of 158 nations on Transparency International’s Corruption Perception Index, Armenia can boast a healthier standing on the control of corruption than Azerbaijan and Georgia. But whether it fully satisfies MCC criteria remains a moot point. International observers have criticized Armenian government for the “inflation of turnout numbers, ballot stuffing, and intimidation of observers� in the November 27 referendum on constitutional amendments. MCC’s CEO, John Danilovich, held off the award and issued a warning to Armenian President, Robert Kocharian. Danilovich expressed concern about the “lack of transparency� in the referendum and stressed that MCC would monitor Armenia’s performance throughout the five-year Compact. Armenia’s Foreign Minister Vardan Oskanian has acknowledged the wrongdoings and pledged in his letter that the government will work hard to fix them. On January 18, Danilovich responded that Oskanian’s explanations had provided “sufficient reasons� for him to proceed with signing the Compact.

Representatives of Armenian NGOs have criticized MCC for a “vague discontent� with the status-quo, adding that the exchange of letters won’t generate a genuine commitment to reforms in the government. They’ve also called for a “more consistent approach� to country assessment—one that would continuously monitor local trends and developments. This comment echoes the Center for Global Development’s recommendation for a more comprehensive monitoring in Georgia to determine the government’s “commitment to strong policies and institutions� over a “sufficient period of time.�

“MCA Compact Countries are required to maintain performance on the selection criteria even after they have received a compact,� said Sherri Kraham, MCC’s Development Policy Director in Washington, DC. She added that MCC’s policy envisages circumstances, under which the agency might suspend or terminate assistance to countries.

Azerbaijan: Is There a Hope?

Azerbaijan’s failing on all six indicators in the “ruling justly� category has essentially disqualified it both from Compact funding and so-called “threshold� funding. MCC’s Threshold Program provides policy advice to governments that have demonstrated commitment to reforms but need to further improve their policies to become fully eligible.

While Azerbaijan’s role as the US’s economic and political partner in the region becomes increasingly important, the pressure on Azerbaijani government to democratize appears to grow as well. Most recently, international observers have criticized Azerbaijan’s presidential and parliamentary elections of 2003 and 2005, respectively, as unjust and non-transparent. Ranked 137th out of 158 countries, Azerbaijan also lags behind its two South Caucasian neighbors on the Transparency International’s corruption scale.

Last October, President Ilham Aliyev heeded to the Council of Europe’s recommendations and signed a decree enforcing public officials’ accountability for procedural violations in the conduct of elections. He also approved the inking of voters’ fingertips to prevent multiple voting. However, observers dismissed these measures, which Aliyev introduced two weeks before the parliamentary ballot, as “too little, too late.� Results in several election districts have been cancelled, with repeat elections scheduled for May 2006.

“Azerbaijan has been a candidate country for each of the past three years�, said MCC’s Sherri Kraham. “We expect that it will be a candidate, and will be reviewed, again for fiscal year 2007�, she noted.

CONCLUSIONS

Despite some legislative advances, Georgian Government still needs to reign in the corruption and improve its economic policies. “Apparently, the MCC Board wanted to support Georgia’s political transition and newly elected president, Mikhail Saakashvili. While this goal is certainly justifiable from a US foreign policy prospective, it is not an appropriate use of MCA funds � note Sarah Lucas and Steve Radelet of the Center for Global Development (CGD), a Washington, DC–based think tank that monitors MCC activities.

The fact that Armenia was approved for funding despite its checkered record has spurred speculations. Some suggest that, as in Georgia’s case, the Bush Administration wanted to reward a strategic ally. Others talk about the pressure on MCC to “get money out of the door� to prove the agency’s utility to Congress. The $2.5 billion MCC left unspent in 2004–2005 may, in part, explain why the Congress has chopped the agency’s request for 2006 funds from $3 billion to $1.7 billion. Commenting on MCC’s slow start-up, Congressman Henry Hyde, Chairman of the House International Relations Committee, observed: “Combined with the prospect for billions more coming on line in 2007, it seems we have more funding than program. I would prefer that Congress catch up and fund success, than need to justify funding for a potential one.�

According to CGD’s Sheila Herrling, MCC reviews candidate countries’ performance annually, while adding new countries and taking out others.

In theory, this leaves a window of opportunity for Azerbaijani Government but just how much time it might need to sufficiently improve its record is anyone’s guess. However, one should not rule out the possibility of foreign policy agenda overshadowing the US Government’s developmental concerns for yet another time.

Opinions expressed in this article do not represent the views of any organization or institution.