An MCC Compact for Tunisia

February 1, 2017

by Samantha Parks

On December 13,  the Millennium Challenge Corporation (MCC) announced it had selected Tunisia as eligible for significant funding to “encourage economic growth and reduce poverty.” The MCC cited the “opportunity to work with Tunisia as it consolidates its recent democratic gains, takes on a significant policy reform agenda, and combats poverty and inequality challenges.” While the MCC has not released further details, on December 15, the Tunisian Minister of Industry and Commerce Zied Laadhari announced that the MCC agreed to negotiate a four-year, $400 million grant.

In 2004, the MCC was established as an independent U.S. foreign assistance agency designed to deliver aid using different criteria and processes. It awards funding to developing country governments that demonstrate a commitment to reform and good governance. MCC grants, known as compacts, support economic growth and governance projects that are proposed and implemented by countries selected by the MCC board. After selection by the MCC, a compact-eligible country completes a report that identifies the binding constraints to growth that “are the most severe root causes that deter households and firms from making investments […] that would significantly increase incomes.” The compact-eligible government then develops its own grant proposals in consultation with a range of stakeholders in society. The MCC provides feedback at each step in the process, which eventually results in compact proposals.  If the MCC accepts the country’s proposal and awards it a compact, it sets up its own local Millennium Challenge Account (MCA) to manage and oversee implementation locally and to ensure accountability. The MCC emphasizes the importance of host country ownership and capacity-building throughout the entire compact process.

To receive MCC funding a country must qualify as having a low-income or lower middle-income economy. For the current 2017 Fiscal Year, the MCC defines low-income economies as those with a Gross National Income (GNI) per capita of $1,025 or less in 2015; lower middle-income economies are those with a GNI per capita between $1,026 and $4,035. MCC compacts are awarded to some of the world’s poorest countries, but the other requirement is a demonstrated commitment to good governance, economic freedom, and investments in citizens. These criteria are measured using a series of policy indicators compiled into country “scorecards” to determine compact eligibility. MCC’s largely transparent, indicator-based system for assessing countries’ policy performance was intended to minimize pressures to select countries for reasons other than their policy performance, such as security interests or other foreign policy goals.

Tunisia will become the third MENA country to undertake an MCC compact. In 2007, MCC signed a $697 million compact with Morocco, and in November 2015, Morocco signed a second compact for $450 million. Jordan received a $275 million compact that began in December 2011, despite criticism that the country did not meet important governance criteria and was already a recipient of large amounts of U.S. foreign aid. Jordan is not currently eligible for another compact because it has been upgraded to upper middle-income status. The Jordanian government is pushing for reconsideration, arguing that its income status does not reflect the economic strain caused by the country’s influx of Syrian refugees. As of April 2016, the Jordan and Morocco compacts represent 13 percent of cumulative MCC compact funding worldwide.

This is not the first time Tunisia has been on the MCC’s radar. In 2011, as Tunisia began its historic democratic transition, the country scored too low on certain indicators to qualify for a compact. Eager to support Tunisia’s economy at that crucial time, the MCC board instead opted to select Tunisia as eligible for a two-year threshold grant (typically $20-$30 million), which are designed to help countries undertake reforms that would help them become compact-eligible. At the time, MCC Chief Executive Officer Daniel Yohannes explained: “Tunisia is at the heart of the Arab Spring. We congratulate the people of Tunisia on their burgeoning democracy. We recognize, however, that Tunisia’s ability to sustain its democratic transition is linked to the progress it makes on its economic transition. MCC is looking forward to partnering with the Tunisians on a policy reform-based program to identify and address binding constraints to economic growth.”

In February 2012, the MCC and Tunisia formally launched the first phase of Tunisia’s threshold program, in partnership with the African Development Bank, USAID, and the U.S. Department of State, by completing an economic diagnostic analysis, also called a constraints analysis. The 226-page analysis identified two main binding constraints to inclusive economic growth: the lack of public sector accountability and weak rule of law; and the high fiscal and regulatory costs for firms to employ workers. The report also cited frequent strikes, social unrest, and lack of effective institutions as challenges.

Tunisia’s threshold program never got past the initial planning stages, however. The MCC board was aware when it selected Tunisia that the North African nation would be moving to upper middle-income country status in FY2012, which would preclude it from compact eligibility even if it successfully completed threshold reforms. As Sarah Rose and Franck Wiebe of the Center for Global Development noted, the use of threshold funds for a country not likely to be compact-eligible “troubled many MCC staff, members of Congress, and independent supporters.” For this reason, Congress enacted language in the FY2014 appropriations bill that prohibited threshold programs for countries that were not compact-eligible.

Tunisia is now eligible for a compact because with its post-revolution economic slump, its GNI per capita has fallen to $65 below the lower-middle-income ceiling. Though Tunisia’s democratic transition has improved its policy “scorecard” enough to grant it eligibility, many of the binding constraints cited in the 2013 Threshold analysis still ring true today. Disillusionment among Tunisians has grown as successive governments beset by bureaucratic and security challenges have failed to deliver on promises of development and infrastructure improvement. The informal economy has outgrown the formal economy, accounting for as much as 53 percent of the country’s GDP as overlapping regulations and a lack of transparency impose high costs on legitimate businesses. Tunisia now faces the complex challenge of balancing difficult economic reforms with social and security demands. If the MCC compact is implemented, it could provide important support and technical assistance for a range of crucial improvements by providing a multi-year commitment, contingent on Tunisia carrying out the agreed reforms.

MCC support appears as a significant boost for Tunisia at a time when foreign assistance levels face uncertainty under the new Trump administration.  American bilateral aid to Tunisia has grown from just $14.6 million in FY2009 to approximately ten times that amount, with $141.9 million granted in FY2016 appropriations (and the House granting $145.4 million and the Senate $160.4 million in their respective FY17 appropriations bills, due to be reconciled by April 2017).  However, this is still less than a number of other countries in the Middle East and North Africa receive, and many believe the Arab world’s only democratizing country deserves much more support from the United States. While Tunisia still faces many political, economic, and security challenges, its selection by the MCC represents an important step forward in the U.S.-Tunisia bilateral relationship and in international support for its democratic transition.

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