Unlike the EU, who focuses more on individual airlines - its "black list" - the FAA focuses on the country's regulatory authority's ability to oversee their airlines. They inspect the GCAA/DGCA/ENAC etc. Basically the FAA looks at how well they are enforcing the local rules. They will not, except in extreme cases, look at individual regs, so the feds don't care, for example, how many hours are being flown per year unless the GCAA is looking the other way while the regs are being broken. The feds are not there to impose their rules on the locals, just as a US pilot is not hammered upon landing in the EU with over 900 hours this year in his logbook.
If this were all there was to it, life would be good. Unfortunately politics has to have its say. For an agency who in theory has a mandate to be above politics to promote safety, the FAA is probably one of the worst offenders of allowing politics and economics to triumph over safety and common sense. A country's category rating will have more to do with its importance to the US govt. than its airline safety stats.
I was in Venezuela in 2006 when the country was upgraded from Cat. 2 to Cat. 1. This had nothing to do with safety, security, and oversight. It seems that a large US airline wanted more frequency into CCS and had been getting the finger by the Venezuelan govt. Politics wins out and voila, now they are magically a Cat. 1 country. I can attest personally that absolutely nothing improved there to warrant the upgrade. The real fallout was borne by Miami ATC who has had to deal with the lion's share of increased flights by Ven. carriers' flights. We used to shake our heads after listening on freq. to some of the exchanges.
Similarly, Nigeria has recently been upgraded to Cat. 1. Does anyone know first hand if the Nigerians have materially improved their aviation system and oversight, or perhaps politics and money has trumped common sense once again?