However, there is an alternative route that has some promise: to go in the opposite direction and let future EC Development Policy Statements also cover the aid pro- grammes of member states. In the longer term this could even go so far as to let the bilaterals pool their resources in EC coffers. This would be a huge political challenge, and it is hard to see that it can be realised in the near future. If EC aid instead con- tinues more or less on its present scale (the likely scenario in the short term), con- sideration needs to be given to how coordination can be improved between EC aid and bilateral aid – and with aid from other donors. Providing more general forms of aid, such as balance of payments support, would lessen the coordination problem and increase ownership. To the extent that different donors finance the same proj- ect or programme, one donor (bilateral or EC) could act as the coordinating agent responsible for government contacts and follow up.
The EC may also have a comparative advantage relative to the bilaterals and the international financial institutions (IFIs) when it comes to pushing for democracy and governance. Since these areas will probably become more important, this may be a reason not to abandon EC aid.
The EU is committed to providing 0.7 percent of gross national income (GNI) in aid no later than 2015, and to support the debt reduction initiatives that are in place. These commitments need to be taken seriously, but a number of the old (pre-2004) member states and, in particular, the newcomers (who joined the EU in 2004 and afterwards) are unlikely to live up to this commitment. Moreover, EC aid allocation is geared to commercial interests, although it takes a very altruistic stance in offi- cial proclamations. There is a need to take the EU's aims and the commitment to achieving the UN Millennium Development Goals more seriously, and to shift coun- try allocation in favour of the poor countries with, of course, due consideration for their ability to handle the resources effectively.
Trade is the most important area within the development policy framework. The economic arguments for eliminating trade restrictions on the exports of poor coun- tries are obvious, but the political influence of specific groups hinders this extreme- ly important policy change. The mishandling of the Doha Round and the continued pursuit of the Common Agricultural Policy (CAP) is a disgrace. Both trade-distorting domestic support measures and trade restrictions distort agricultural markets. Aid efforts are countered by trade policies locking exporters from less developed coun- tries (LDC) out of the European market. All EU countries and the EC should change their policies to make their trade and agricultural policies coherent relative to the development goals. Since this is an area where the EC handles the WTO negotiations for all member states, this is a natural area of strong EC involvement.
The EU has often reiterated the need for policy coherence for development. Coherence in this context means that each country as well as the EC should make sure that they pursue policies that support the stated development goals and do not undermine them. They need to make sure that aid, debt and trade policies support each other. The present situation leaves much to be desired!
The remainder of this chapter provides the underpinning of the conclusions sum- marised above. It starts with a brief review of the changing global economic environ- ment and then goes on to examine the EU's development policy. The areas covered are aid, debt reduction and trade. Some policy areas (for example migration and security), which the EC considers as parts of its development policy, will be covered by other chapters in this volume. In the light of the results of this review I will dis- cuss the policy changes that should be made to better equip the policy to achieve the stated targets.
The global economic environment
In recent decades the dependence on foreign trade among the countries of the world has increased (Table 4.1). At the same time the relative weight of the OECD and the EU in world trade has declined, while the importance of the emerging economies, particularly East Asia and the Pacific, has increased (Table 4.2). In other words, Europe is becoming more and more economically dependent on the economic health of its developing country partners.
Recent economic development in the world's poorer regions has generally been encouraging. We see in Table 4.3 that East Asia and the Pacific, as well as South Asia, are catching up, and they represent a very large share of the world population2
. The economic improvements that many parts of the world have experienced are cer- tainly related to their successful integration into the international economy (see Cline and Williamson 2005 for a review of the evidence). There are no countries that have achieved significant economic success in isolation.
In total, the global incidence of poverty, as measured by the World Bank indicator of one dollar per day in consumption expenditure, declined from 40 percent to 21 per- cent between 1981 and 2001 (Table 4.4). Poverty reduction in Asia has been spec- tacular, but poverty has not declined in sub-Saharan Africa, the world's poorest region. Parts of the former eastern bloc have seen poverty increase since the break- up of the Soviet Union, but most of those countries have seen considerable recov- ery in the last few years. Latin America has not made much progress in terms of poverty reduction, but poverty is still at a comparatively low level.
1990 1995 2000 2004
High income: OECD 17.1 18.8 21.9 *20.4
European Monetary Union – EU12 26.9 29.3 36.7 36.5
East Asia & Pacific 24.4 29.4 36.1 42.9
Eastern Europe & Central Asia 23.7 31.1 40.9 41.9
Latin America & Caribbean 17.1 18.7 20.6 25.7
Middle East & North Africa 26.3 25.9 28.4 33.9
South Asia 8.6 12.5 14.8 19.0
Sub-Saharan Africa 27.2 28.7 32.4 32.3
World 19.0 21.2 24.6 *23.9
Table 4.1: Export of goods and services (% of GDP)
Source: World Bank (2006a). * 2003.
1990 1995 2000 2004
High income: OECD 73.3 70.1 66.6 63.9
European Monetary Union – EU12 35.2 32.4 28.4 31.1
East Asia & Pacific 3.9 6.2 7.7 9.8
Eastern Europe & Central Asia 4.7 5.0 6.8
Latin America & Caribbean 3.9 4.3 5.3 4.8
South Asia 0.8 0.9 1.1 *1.2
Sub-Saharan Africa 1.8 1.4 1.4 1.5
Table 4.2: Share of world exports of goods and services (%)
Source: World Bank (2006a). * 2003.
1990 1995 2000 2004
High income: OECD 100 100 100 100
European Monetary Union – EU12 89.6 89.1 88.6 87.0
East Asia & Pacific 8.0 11.4 13.2 16.6
Eastern Europe & Central Asia 33.4 22.6 22.5 26.0
Latin America & Caribbean 25.7 26.2 24.9 23.9
Middle East & North Africa 17.6 17.5 16.9 17.9
South Asia 7.1 7.6 8.0 8.9
Sub-Saharan Africa 7.2 6.2 5.7 5.7
Table 4.3: Relative GNI per capita (PPP), current international dollars
The economic take-off in large countries such as China and India, as well as most countries in East and South-East Asia, has also meant a reversal of, or a stop to, the increase of global income inequality, which began in earnest with the industrial rev- olution 200 years ago. Global inequality as measured by the Gini-coefficient, and with countries weighted by populations and ignoring income inequality within countries, suggests that inter-country inequality actually started to decline in around 1980 (Table 4.5). Bourguignon and Morrison (2002) have computed the Gini-coefficient for the world for the period 1820-1992 attempting to allow for changes in within-country inequality. According to their estimates the global Gini- coefficient increased consistently until about 1950, while the changes thereafter have been comparatively small.
The debate on these estimates continues (Milanovic 2006), but it is clear that large parts of the developing world are growing more quickly than the richest countries. They are thereby reducing the inter-country income gap. The countries at the bot- tom of the income hierarchy, however, are slipping even further behind. If we meas- ure inequality as the gap between the people in the industrialised world and the poorest 10 percent in the world, mainly in sub-Saharan Africa, the gap continued to increase until the turn of the century. Since then Africa has seen some economic recovery following the commodity boom, as well as a series of policy reforms that have improved the policy environment (Pattillo, Gupta, Carey 2005). But Africa’s plight remains the key development challenge facing the international community.
1981 1987 1993 1999 2001
East Asia & the Pacific 57.7 28.0 24.9 15.7 14.9
(China) 63.8 41.0 28.4 17.8 16.6
(excluding China) 42.0 27.0 16.7 11.0 10.8
Eastern Europe & Central Asia 0.7 0.4 3.7 6.3 3.6
Latin America & Caribbean 9.7 10.9 11.3 10.5 9.5
Middle East & North Africa 5.1 3.2 1.6 2.6 2.4
South Asia 51.5 45.0 40.1 32.2 31.3
(India) 54.4 46.3 42.3 35.3 34.7
Sub-Saharan Africa 41.6 46.9 44.1 45.7 46.4
Total 40.4 28.4 26.3 21.8 21.1
(excluding China) 31.7 28.4 25.6 23.1 22.5
Table 4.4: Percentage of the population living on less than $1 per day, 1981-2001
Overall it is encouraging that poverty and inter-country differences are declining, but very much remains to be done and that is why EU development policy remains important. The needs vary by region, and the policy needs to take this into account.
The structure of EU development policy
EU development policy has gradually changed from a focus on aid to former colonies, to include global trade issues and efforts to promote peace and stability. In its relationships with developing countries, the EC considers the political, com- mercial and social aspects. Apart from discussing EC development policy we will also touch on the bilateral development policy of the member states. The goals and policies of the EC and the member states are complex and sometimes contradicto- ry. Policy coherence and coordination among the European institutions will there- fore be discussed in this chapter.
EC policy
Many actors are involved in EC development policy. The prime movers are the European Parliament and the Council of Ministers, which take decisions on the gen- eral direction of the policy. The European Commission initiates policy formulation and implements development policies. Within the European Commission the Directorate-General for External Relations is responsible for political governance through country strategies for different regions (except Africa), as well as aid with political content such as human rights and security. The Directorate-General for Development deals with policy and formulation of development cooperation and is responsible for the country strategies for Africa. The European Commission Office for Humanitarian Support (ECHO) is responsible for the management of humanitar-
Year Gini Year Gini
1900 0.393 1970 0.539 1913 0.427 1980 0.544 1929 0.458 1985 0.531 1938 0.448 1990 0.526 1950 0.530 1995 0.498 1960 0.521 1998 0.496
Table 4.5: World distribution of income (Gini-coefficients) 1900-1998
Note: the numbers are based on data for 49 countries for GDP per capita in 1990 prices adjusted for purchasing power. Countries are weighted by population shares.
ian aid channelled through NGOs and to some extent United Nations (UN) organisa- tions. Finally, the Directorate-General for Trade and the Directorate-General for Enlargement are also active in areas that are important for development goals. The member states provide the funds for the general EC budget and the European Development Fund. The Court of Auditors is responsible for overseeing how efficient- ly the money is spent, and the European Court of Justice controls compliance with treaties.
Article 177 in the Maastricht Treaty spells out that EC policy should foster sustain- able economic and social development in the developing countries, and more particularly the most disadvantaged among them. Policy should also smooth the gradual integration of developing countries into the world economy, and combat poverty in the developing countries. The EC is to promote democracy and the rule of law, and respect for human rights and fundamental freedoms.
The ambition is that the EC should intervene in areas where it has a comparative advantage relative to the member states. The areas selected (European Commission, 2000a)3
are the link between trade and development, support for regional integration and cooperation, support for macroeconomic policies, trans- port, food security and sustainable rural development, and institutional capacity building, particularly in the areas of good governance and the rule of law. EU inter- ventions have in practice not been limited to these six focal areas, however. The Commission is also committed to assisting developing countries in achieving the UN Millennium Development Goals.
There are two mechanisms for Commission aid. First, there is the European Development Fund, which is replenished from time to time by member states. This money is used for aid to the African, Caribbean and Pacific (ACP) countries. It is gov- erned by the Cotonou Agreement of 2000, which lasts for 20 years and guides the EU’s collaboration with ACP countries4
. The main aim is to help these countries reduce poverty. The agreement also covers trade, with planned future collaboration arrangements known as Economic Partnership Agreements (EPAs). Secondly, there is the general EC budget that allocates money for development assistance to all other regions.
The EPAs are a major new feature of the relationship between the EU and the ACP countries. They differ from earlier agreements in two major ways. First, they are more reciprocal in nature, to ensure WTO-compatibility. Second, they are not between the EU and the ACP states as a whole but between the EU and various regional groupings. The aim is to create free trade areas between the EU and the
regional EPA negotiating blocs. The agreements are intended to cover liberalisation of trade in goods and services, promote regional integration, provide development finance and cooperation, and support improvements in institutional rules for busi- ness (Gasiorek, Winters 2004). The EPAs are scheduled to come into force on 1 January 2008. However, they are controversial and so far no negotiations have been successfully concluded. Until the WTO-compatible EPAs enter into force, the non-reciprocal Lome IV preferences will continue to be applied despite being WTO incompatible.
Already before the launch of the EPAs, EU agreements with developing countries generally covered development cooperation, political dialogue, and trade. They are thus broader than the typical aid programmes of bilateral institutions. The ongoing programmes are the European Development Fund for the ACP countries, the pro- gramme for South Asia, external assistance to Asia and Latin America (ALA), sup- port to Mediterranean and Middle East countries (MEDA), the technical assistance programme for Eastern Europe and Central Asia (TACIS), EC assistance for recon- struction, development and stabilisation of the Balkans (CARDS), and the pre- accession programme for Eastern European countries (Phare).
A new EU Financial Perspective (a multiannual EC budget framework) applies from January 2007. In the consultations about the EU's future development policy, car- ried out in 2005, a clear majority of stakeholders agreed that poverty eradication should remain the main goal of the policy and that there should be a continued focus on the achievement of the UN Millennium Development Goals (European Commission 2005). It was also argued that development policy should not be sub- ordinated to the Union’s common foreign and security policy nor to its migration pol- icy. Rather other policies, particularly trade and agriculture, should be aligned with development policy (see the recent proposals in European Commission 2006). The ‘European Consensus on Development’ (European Parliament, Council, Commission 2006) states that ‘the primary and overarching objective of EU development coop- eration is the eradication of poverty in the context of sustainable development, including pursuit of the Millennium Development Goals’.
Member state policies: the UK example
The member states handle the bulk of EU development assistance (80 percent). Possibly the most interesting bilateral donor is the UK, where the Department for International Development (DFID) has been at the forefront of the debate in recent years and has gone further than most other donors in introducing new thinking. So we will start by looking at UK policies.
In the late 1990s the UK's Overseas Development Administration was upgraded to the Department for International Development with its secretary of state becoming a member of the ministerial cabinet (OECD 2002). This raised the profile of aid issues and helped to promote the coherence of policies across departments. An interdepartmental working group on development, chaired by the secretary of state for international development, was created to help mainstream development policy. This group includes a dozen departments whose policies affect development. Since that time, the UK's ambition has been to play a key role internationally. Former finance minister Gordon Brown pushed development finance concerns in the IFIs, and former prime minister Tony Blair successfully engaged world leaders for increased aid, to Africa in particular, at the G8 Gleneagles Summit in 2005.
The UK set out its trade and development policy in its Globalisation White Paper, which outlined a strategy to enable LDCs to gain from international economic inte- gration. The UK has actively tried to influence the global trade agenda, and pushed to make the Doha Round a development round. The UK was also actively involved in the debate on the EU’s Everything But Arms initiative, to open up to all imports from the LDCs except weapons5
. As in other countries, there are domestic lobbies active- ly working against free trade initiatives in some areas (such as sugar).
The UK has followed up the report of the Commission for Africa (2005) and the G8 commitments of 2005, as well as the Paris Declaration, with a white paper on its aid policies (DFID 2006a). There, it spells out how it will work to increase its develop- ment budget to 0.7 percent by 2013. It emphasises that its aid will be based on the recipient committing to reduce poverty, uphold human rights and international obli- gations, and to improve financial management, governance and transparency. It aims to work to improve the international system and for improved accountability of recipient countries. The UK wants to work more closely with its European partners on development issues. It will participate in multi-donor arrangements in all devel- oping countries where it has a bilateral programme and it will develop more joint strategies and co-financing arrangements with the EC and other EU member states.
The thinking in the UK is not unique, but reflects trends within the donor communi- ty generally. The Nordics and the Netherlands have moved in a similar direction, as have other European donors, though to a lesser extent.
Aid volumes
The EU is the world’s leading development aid provider. Jointly the EC and the mem- ber states account for around 55 percent of total overseas development assistance
(ODA). The total volume of OECD Development Advisory Committee (DAC) aid was about $80 billion in 2004 and $106 billion in 2005. The increase was mainly due to $19 billion in debt relief granted to Nigeria and Iraq by the Paris Club (World Bank 2006b). Debt forgiveness grants will remain significant in 2006, but then the prom- ised increases in ODA will have to take the form of transfer of resources, which will put more pressure on donor budgets. In the last few years we also saw considerable increases in non-debt private flows in the form of foreign direct investment (FDI)6 and inward remittances.
Total aid varies considerably between EU countries. The total contribution of the 15 pre-2004 EU members increased only slightly between 2001 and 2004 from 0.33 percent of GNI to 0.35 percent (Table 4.6). Only Denmark, Luxembourg, the Netherlands and Sweden reached the 0.7 percent target set by the UN decades ago. This was reaffirmed as a goal for 2015 at the Gleneagles summit, as suggested by the UN (2005) and the Commission for Africa (2005). The EU has adopted the goal of 0.7 percent of GNI for 2015, with an intermediate goal of 0.56 percent by 2010 (European Parliament, Council, Commission 2006, §5). For some countries, such as Italy at 0.15 percent, it will be a major effort to reach the intermediate goal. The countries that joined the EU in 2004 so far contribute little. The share of foreign aid from the old EU members channelled through the EC was 22.6 percent in 2001, but