European Development Fund: The illusion of assistance

Furthermore, the trade in goods component of the agreements requires the liberalisation of tariffs, which threatens the viability and livelihoods of existing rural producers and industry and has sombre implications for government budgets. Moreover, the current proposals would entail African governments freezing all remaining tariffs at zero, effectively relinquishing the right to use tariff policy as an instrument for development. The EU proposes that these agreements should include rules on services, investment, competition, intellectual property and government procurement. As such, these proposed agreements are far more than trade agreements, and enter into areas of domestic economic policy that have not even been discussed in many African countries, let alone agreed at a regional or continental level.

Whilst rules in all these areas are needed for development, it is imperative that such rules reflect the changing needs and priorities of the countries concerned. Despite the EU’s insistence on including these issues in any agreement, it is not clear what African countries would gain and the costs could be high. Yet, agreeing to these rules would require countries to consult the EU when they needed to change them thus undermining national and regional policy flexibility.

Implementing an EPA will clearly be costly for ACP countries in terms of losses in tariff revenue and employment. In addition, impact assessment studies show that for ACP countries to reap any benefits from increased market access provided under EPAs, [1] they first need to address the major supply side constraints that impede competitive production. One study estimates conservatively that total ‘adjustment costs’ such as compensation for loss of tariff revenue, employment, production, and support for export development for ACP countries could be about €9.2billion. [C. Milner ‘An assessment of the overall implementation and adjustment costs for the ACP countries of Economic Partnership Agreements with the EU’, in Grynberg, R. and A. Clarke (2006) ‘The European Development Fund and Economic Partnership Agreements’, Commonwealth secretariat economic affairs division]

THE ILLUSION OF AID

The EU has a history of providing substantial development assistance to ACP countries, covering areas such as health, education, water and sanitation, and roads. This support is channelled through the European Development Fund (EDF) and disbursed in five year cycles. In response to ACP concerns about the costs of EPAs, the EC (European Commission) has pledged to increase the amount pledged under the next EDF funding cycle (2008–13) to €22.7billion [At Port Moresby ACP Council of Ministers, May 2006]. At first glance this would seem to be sufficient to meet the EPA adjustment costs, but deeper scrutiny suggests that this assistance may be more illusion than reality.

The EC suggests that funds to compensate ACP countries for the costs of implementing EPAs would come from the tenth EDF funding cycle (2008-13), for which a total of €22.7billion has been pledged. Yet, even before EPAs came onto the scene, it was estimated that €21.3billion would be needed for the tenth EDF funding cycle, merely to fund the costs of the EU’s existing aid portfolio and maintain EU contributions at 0.38 per cent of the EU’s gross national income (GNI). [R. Grynberg and A. Clarke (2006) ‘The European Development Fund and Economic Partnership Agreements’, Commonwealth secretariat, economic affairs division] If this is the case, the tenth EDF is merely business as usual. Rather than provide new funds for EPAs, the EC will cover EPA adjustment costs from its existing aid budget diverting money away from other areas, such as health, education, and rural development.

Even if ACP countries decide to use existing aid money for EPA adjustment costs, it might be very slow in arriving. During the last five year cycle (2001–06), the EU promised €15billion in aid to ACP countries. By the end of the cycle, only 28 per cent of this money had been disbursed. The record for the previous cycle was even worse. For 1995–2000, a promise of €14.6billion was made. Funds only started to be disbursed in the third year, and by the end of the five years only 20 per cent had been paid out. Since ACP countries will quickly feel the impact of EPAs on their economies, the EU’s disbursement mechanisms clearly need a major overhaul if EU assistance is really to make a difference. ACP governments are wary of the EC’s smoke and mirrors approach to development assistance and have called for a separate and additional EPA financing facility, [Nairobi declaration on Economic Partnership Agreements, African Union conference of ministers of trade, April 2006] so that the EC can be held to its promises and funds can be clearly tracked. To date, this has not been agreed and the promise of assistance remains a mirage.

AID QUANTITY AND QUALITY

In 2005, 15 European member states agreed to increase their aid to 0.7 per cent of GNI by 2015. As part of this agreement they set a series of interim aid targets in 2006 and 2010. Official figures released by the OECD (Organisation for Economic Co-operation and Development) this year, showed that the EU15 are on track and have met their collective aid target in 2006. However, almost one third of EU aid - €13.5billion - was artificially inflated due to EU member states including debt cancellation and spending within Europe on refugees and foreign students’ education as aid. If these non aid items are deducted from official figures, EU member states missed their collective 2006 target of giving 0.39 per cent of GNI as aid, providing only 0.31 per cent. If EU member states continue to significantly inflate their aid figures with these items, by 2010 poor countries will have received nearly €50billion less than what they have been promised.

In order to fight poverty, the EU not only needs to provide more aid, it also needs to provide better quality aid. The EU has made some welcome commitments towards improving aid effectiveness which must be met, including agreeing to meet the Paris aid effectiveness targets and setting its own targets on joint analyses and multi-annual strategic planning. In addition the EU must also ensure a greater percentage of aid goes to Least Developed Countries (LDCs) which need it most. It should also provide more aid on a long term and predictable basis.

AID FOR TRADE

Much broader than simple technical assistance or training of trade negotiators, ‘aid for trade’ describes several categories of trade related assistance to African countries. Its objectives include enhancing worker skills, modernising custom systems, building roads and ports, and improving agricultural productivity and export diversification. Aid for trade aim to help African countries to adapt to the global trading environment. However, aid has rarely been a simple transfer of resources from developed countries to aid recipient countries. Often, aid comes to African countries attached to a development ‘toolkit’ in the form of aid conditionality. This toolkit involves trade policy prescriptions in the form of structural adjustment programmes that are often a conceptual expression of the political and economic ideology of the donors rather than the development priorities of the receiving countries.

The World Bank and the IMF, in response to request from the G7 finance ministers and the G8 in Gleneagles, jointly proposed an aid for trade package. [‘Doha development agenda and aid for trade’, prepared by staffs of the IMF and the World Bank, 9 September 2005 (DC2005-0016)] The package is a proposal for provisions of financial and technical assistance to developing countries for two related objectives. Firstly, to address supply side constraints in developing countries (‘maximisation of benefit’) and secondly to assist them in coping with the adjustment cost of trade liberalization, which is assume to be transitional (‘minimisation of the cost’). The 33 African LDCs, according to the World Bank and IMF, have not been able to take full advantage of the benefits of the multilateral trade liberalisation because of limitation that invade on their trading capacity or supply side constraints. The maintenance of high unbound tariffs that, says the Bank, create ‘disincentives to enter international markets’. The two Bretton Woods institutions entertain the idea that trade liberalisation could be realised if such limitations are mitigated through increased financial and technical assistance.

LDCs have been granted quota free and duty free market access to EU’s market. In the context of low productive capacity, poor infrastructure, limited access to research and technology, and inadequate financial markets, liberalised markets will not stimulate economic growth nor address the structural issues of development.

To genuinely assist poor countries, aid for trade must not only be additional to development aid and meet standards of aid effectiveness, such as those outlined in the Cotonou agreement, but they should also complement a prodevelopmental round of trade negotiations that puts receiving countries’ interests at the core of the negotiations. Fundamentally, aid for trade should not be used as a ‘bargaining sword’ in exchange for a one size fits all trade liberalisation package.

IMPROVING AID

Further, the European commission and the EU member states need to provide, when and where appropriated, aid directly to African countries national budgets, either centrally supporting a government or supporting a particular sector such as health and education. The European commission has already signed up to providing 50 per cent of its aid via budget support. However, over 90 per cent of the additional EU aid flows will come via member states bilateral aid. It is therefore important that EU member states also make the commitment to provide 50 per cent of their bilateral aid via budget or sector support.

The EC and the EU member states should also move towards providing more of their aid on a long term basis and should stop the current practice of attaching economic policy conditions to their aid. With this regard, the EC’s proposal for ‘MDG (Millennium Development Goal) contracts’, which would provide six year budget support and come with a reduced number of conditions set around the attainment of the MDGs, should be supported by member states and put in place immediately. Member states should also move towards providing more long term aid (over six to ten years) and phasing out attaching economic policy conditions to their aid.

Tying aid to the purchase of goods and services from donor countries continues to be a serious problem affecting the quality of EU aid. Most European governments still tie their aid. This practice results in an increase in the cost of purchasing goods and services, meaning that poor countries can afford to buy significantly less. It also acts as an expensive subsidy to donor country industries and jobs, and can potentially damage poor country markets. Untying aid would increase the value of aid by up to 30 per cent.

Despite the rhetoric and repeated commitments, policy coherence for development is in practice missing in many areas of EU policy. Even where EU policy is indeed coherent with development objectives, the implementation of those policies frequently lacks coherence with those objectives.

Furthermore, there continue to be institutional divisions within the commission, which cause significant problems to the coherence and consistency of aid programmes. These revolve around the split of development aid regional policy and programming between the EC’s directorates general for development (ACP) and for external relations (ALA, MEDA etc), with EuropeAid undertaking the contract issuing and management of the implementation of the commission's aid programmes. This division of responsibilities within the Commission and the gap between development policy formulation and implementation prompts considerable concern about the possibility of achieving a consistent and coherent development policy.

CONCLUSION

African countries do not need to be apologetic or even feel guilty about needing aid to better benefit from trade. All developed countries have benefited from aid and heavy investment to increase production and trade capacity before engaging fully in international trade. Aid for trade is not charity.

Besides, implementing an EPA will clearly be costly for ACP countries. One study estimates conservatively that total ‘adjustment costs’ such as compensation for loss of tariff revenue, employment, production, and support for export development for ACP countries could be about €9.2billion. This conservative estimate clearly shows that the €2billion extra, which the EU has pledged to provide for trade-related assistance (of which a ‘substantial amount’, but not all, would be devoted to ACP countries) would not be enough. And there are legitimate concerns about how speedily any funds could be made available to ACP countries, given the problems with delays in EDF disbursements.

Hence, ACP countries are correct to ask for clarity on what level of funds will be available for trade related assistance and EPA related adjustment costs. Each ACP country already faces challenges to meet the MDGs, for which current aid levels are already insufficient. So they are also correct to demand that these aids for trade funds must be additional to existing development assistance. The EU should urgently provide clarity on how much additional funding ACP countries can expect to receive, for what specific activities, and how – and when – it will be made available to them. Also these additional funds should not be conditional on signing an EPA, nor should they be linked to progress in the EPA negotiations.

* Mouhamet Lamine Ndiaye is the Pan-Africa Head of Economic Justice (OI) at Oxfam GB, West Africa Regional Management Centre in Dakar, Senegal.

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