Evolving EU Relations with Middle Income Countries: Meeting in the middle?


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Florian Krätke, ECDPM, 21 January 2013

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  • Explicit statement 1: poverty reduction and eradication remains the principal aim of EU development cooperation in the coming years;Explicit statement 2: funding for development cooperation is better spent on least developed countries and low-income countries (LDCs and LICs). Later stated in the blog: “(…) some countries can now afford to fight poverty themselves”.Implicit statement: reshaping EU development cooperation in view of global trends in developing countries and, consequently, in the field of development cooperation. This is already the case for the EU’s partnership with certain MICs, e.g. China, Thailand, the Philippines, South Africa and, importantly, the Neighbourhood.
  • Critique of the debate:Over half the world;All countries in the EU Eastern and Southern Neighbourhood are MICs;
  • The MICs category cuts across a number of global trends that challenge the category itself:New classifications have emerged since the MDGs;Classification anomalies (16 MICs are also LDCs);Increasingly diverse geography of poverty (headcount ranges from 2 to over 60% of the population in MICs);Demographic transition, urbanisation and a growing ‘middle class’;Whereas poverty reduction is the stated goal of EU development cooperation, it often comes a distant second when compared to the EU’s economic and security interests > global public goods, EU values and interests, credible and strategic partners for trade, energy and security.
  • 1) Large number of people in FS living close or near poverty threshold, rapid growth of # of poor since 2005 (15>180 million)Fragility or fragile situations (WB list) based on weak institutional capacity, poor governance and political instability. Security issues have effect on EU countries, threat to GPGs and loss of influence;Affects regional poles of power, e.g. Angola, Pakistan, Cote d’Ivoire, Nigeria, Yemen, Sudan2)Rising domestic labour/wage costs erode competitive advantage in key export sectorsExacerbated by a range of factors (speed of) changing structure of economy, low diversification, types/sophistication of goods exported, Consumer goods export-driven growth ‘flying geese model’ is dependent on markets for those products – other MICs are only minor import markets, and barriers remain;Not only emerging economies in Asia, over 30 MICs worldwide and several EU countries3) Third GNI generated by top decileCapacity and political will for taxation lowUnrealistic marginal tax rates4)Pollution of industrialisationSIDS and landlacked and associated economic vulnerabilities
  • ODA not the only field – enlargment and cohesion
  • Note specifics
  • ODA not the only field – enlargment and cohesionNote figures / resultsEP study – blending to evolve into an instrument for investment in UMICs, whereas grants will only be used in MICs for interventions with a direct poverty focus.
  • ODA not the only field – enlargment and cohesionA recent analysis concludes that structural funds have reduced within-country regional disparities over the period 1995-2006, and that beyond some level of transfer intensity (approximately 1.5% of country GDP), the positive impact of structural funds is potentially reversed. Another analysis by the European Central Bank concludes that EU structural and cohesion funds spent during 1994-1999 had a positive, but slight, impact on future economic growth, mainly through the human development component (Checherita-Westphal et al 2009). This seems to be supported by the case of Ireland, which prioritized investment in human resources, education and training by allocating up to 35% of its Structural Funds to human resource investments (against an average of around 25% for other cohesion countries) which is believe to have strongly contributed to the country’s strong period of economic growth after having joined the Union. The findings of this report suggest that countervailing policies cannot redirect patterns of growth and development if the overall policy direction does not promote inclusive and sustainable development, a finding not unlike the emerging lessons on how EU development cooperation can engage in MICs.
  • Majority of financial commitments to conflict prevention and peace-building go towards the MICs, and are less expensive than ‘traditional’ development interventions.The EU has furthermore launched a number of ESDP / CSDP missions since 2003 at the invitation of the host government. Table 6 shows the MICs in which missions have taken place, demonstrating that there has been and still is a demand for EU security interventions. However, there has been some criticism of the strategic relevance and impact of these missions – several of them do not have the necessary scale to lead to sustainable security, and can be interpreted as political statements rather than full-scale interventions. Lastly, the EU has appointed Special Representatives in countries and regions it deems of particular strategic interest, where there is a need for a coherent EU approach.
  • ODA not the only field – enlargment and cohesion
  • Evolving EU Relations with Middle Income Countries: Meeting in the middle?

    1. 1. Evolving EU Relations with Middle-Income Countries Meeting in the Middle? Florian Krätke, Research Assistant 21 January 2013
    2. 2. Introducing ECDPM • Independent development policy ‘think and do’ tank, based in Maastricht (the Netherlands) since 1986; • Providing practical, policy-relevant analysis and support to African and European stakeholders; • Systematic linking with key players in the EU and the ACP through networks and partnerships; • Currently funded by 12 EU Member States.ECDPM Page 2
    3. 3. Framing the policy challenge “I am aware that poverty pockets exist in middle-income countries and will continue to cooperate with these countries on many urgent issues […]. But in reality, EU aid levels are not high in comparison with the budget of these countries and can have higher impact in least developed countries” - Development Commissioner Andris Piebalgs, blog post in October 2011 unveiling the ‘Agenda for Change’ECDPM Page 3
    4. 4. Framing the policy challenge (contd.) $ 1,026 – 4,025 p/c/y $ 4,036 – 12,475 p/c/yECDPM 54 LMICs + 54 UMICs = 108 MICs Page 4
    5. 5. ‘Headlines’ for the discussion • The MICs category is heavily contested in light of global trends and other classifications; • MICs hold a large strategic interest for the EU and its Member States; • The EU already distinguishes between partner countries according to its various policy frameworks and partnerships for external cooperation (e.g. Cotonou, Neighbourhood, strategic partnerships); • Poverty is not the only issue affecting MICs, nor is ODA the only tool for reducing poverty; • MICs cannot simply be considered as ‘LICs in transition to HICs’.ECDPM Page 5
    6. 6. Key issues facing MICs Key, often structural issues which are linked to persistent poverty in the MICs are: • State fragility, notably countries emerging or undergoing conflict(s) or other security crises; • The ‘middle-income trap’ following a period of export- driven growth; • Income inequality as a cause and outcome of persistent poverty; • Environmental vulnerability heightened by industrialisation and geography-related economic vulnerability.ECDPM Page 6
    7. 7. Opportunities and challenges for EU cooperation with MICs Within the context of the decreasing relevance of ODA: • Supporting domestic resource mobilisation in MICs can lower the cost of reducing poverty; • The EU’s open definition of poverty and commitments to MICs in development policy gives the EU flexibility to reshape development cooperation with MICs; • New forms and modalities of cooperation and funding need to be explored, including those used in the EU’s other policy frameworks for MICs.ECDPM Page 7
    8. 8. Selected instruments and modalities for engaging with MICs beyond ODA The EU currently uses several instruments beyond ODA to engage with the MICs: • ‘Blending’ of loans and grants to make sub-investment grade projects bankable; • Cohesion funding to target and integrate specific regions; • International and regional peace and security operations; • Strategic partnerships covering a broad range of cooperation areas, based on shared norms and values.ECDPM Page 8
    9. 9. Lessons learnt for further EU engagement with MICs • Clearly differentiate and adopt tailor-made approaches for cooperation with MICs; • Clarify the purpose, nature and scope of the EU’s engagement with MICs beyond traditional development cooperation; • Draw on the EU’s track record more systematically and integrate lessons learnt from cooperation with MICs in different regions using different (non-ODA) instruments.ECDPM Page 9
    10. 10. Key questions going forward • How can politically- and strategically sensitive analysis of the MICs be developed to more systematically inform the EU’s engagement with these countries? • What does the EU have to offer the MICs, and what is the MICs’ interest in the EU? What is the EU’s added value over emerging donors? • What is the scope for absorbing and transposing lessons learnt from existing EU instruments into new partnerships with the MICs? • How can ODA best be redirected to target the MICs’ key institutions, vulnerabilities and capacities, including for domestic resource mobilisation?ECDPM Page 10
    11. 11. Thank you Florian Krätke - fk@ecdpm.org www.ecdpm.orgwww.slideshare.net/ecdpm Page 11
    12. 12. Selected instruments and modalities for engaging with MICs beyond ODA Blending instruments Using public funds to leverage/mobilise private finance in support of public functions e.g. infrastructure or service delivery. EU prioritises the complementary use of grants and loans to make sub-investment grade projects bankable. ODA shown to play potential catalysing role for ‘crowding in’ investment in MICs with stable, favourable economic climates. Blending instruments can help MICs bridge funding gaps caused by the phasing-out of ODA (hence EU interest).ECDPM Page 12
    13. 13. Selected instruments and modalities for engaging with MICs beyond ODA Cohesion and integration instruments Set of instruments with different foci within overarching policy framework. ERDF is designed to correct imbalances in development between regions of the EU and concentrates funding on ‘hard infrastructure’ (roads, ICT) investments in less developed regions. ESF disburses funds to improve employment, education and learning to Member States (who administer) – most effective at micro and meso levels to modernise national systems, skills training, workplace activation. Cohesion Fund funds large-scale Trans-European transport networks and energy and transport projects that benefit the environment.ECDPM Page 13
    14. 14. Selected instruments and modalities for engaging with MICs beyond ODA Peace and security operations Added value of EU engagement in conflict prevention and peace-building requires the development and application of an integrated or comprehensive approach. EU can deploy different tools (diplomatic mediation, civilian peace and security missions, humanitarian and development aid) in a coordinated manner (Indonesia, Philippines). Focus on rapid response and short-term actions through aid instruments (IfS) – efforts needed to mainstream conflict prevention and peace-building in other instruments.ECDPM Page 14
    15. 15. Selected instruments and modalities for engaging with MICs beyond ODA Strategic partnerships Partnerships concluded on the basis of shared EU norms and values, covering a broad range of cooperation areas (development, trade, security, climate change, research etc.), of which currently 6 with MICs; Partnerships are built both on choice and necessity, but not necessarily partnerships of equals. Given effect through annual summits and high-level dialogue. Partnerships can be used to enhance the quality of political dialogue.ECDPM Page 15
    16. 16. Further considerations • Implications of MICs discussion on aid proliferation and fragmentation; • Evaluating risks and impact of non-ODA component of blending instruments; • Lessons from Neighbourhood funding (counts as ODA); • Impact and lessons learnt of EU efforts to promote regional trade integration, e.g. Economic Partnership Agreements.ECDPM Page 16