Inequality as new benchmark for bilateral aid

Inclusive Economy,Poverty & Inequality19 Dec 2012Thijs Berman

Over the years the sharp division between developed and developing countries has faded. The economic rise of countries such as Brazil, India and China create a serious need to evaluate and redefine EU development policy. Budget support has seemed to have lost its relevance as some middle-income countries (MICs), like China, have found their way to the G20 and are providing development aid themselves. When EU aid becomes pocket money for a partner country it is time to change the relationship. I therefore support the concept of differentiation that has been introduced into EU development policy. To create more room for bilateral aid to the poorest countries, like Laos, countries like India will no longer receive budget support.

The European Commission’s Communication “An Agenda for Change”, published in October 2011, marked the introduction of differentiation in the EU’s development policy. The Communication stated that “the EU must seek to target its resources where they are needed most to address poverty reduction and where they could have greatest impact”. Currently a new Regulation is being negotiated for the Development Cooperation Instrument (DCI), which sets the priorities and the focus for EU development aid to countries in Latin America, Asia and the Middle East and to South Africa. This legislation will put differentiation into practice for the next seven years, between 2014 and 2020.

In the view of the Commission, the decision to graduate countries out of bilateral aid programmes should be based on GNI per capita, but the co-legislators, the Council and the European Parliament, disagree on the criterion to be used. As the Parliament’s main negotiator, I do not think that this decision can be based on the sole criterion of GNI per capita, as GNI does not reflect social inequalities within countries. Furthermore, there should be more flexibility in phasing out bilateral programmes in MICs. I have therefore proposed a set of additional indicators, such as the Human Development Index (HDI), the Poverty Gap Index and the Income Gini Coefficient. When assessing whether a country still needs bilateral aid, we should take inequality level within the country into account. This is in line with Andy Sumner’s argument that there are two groups of MICs: one with relatively equitable economic growth and a low poverty gap, which means that the costs of poverty reduction are within domestic financial capacity, and a second with unequal growth and larger poverty gaps. The latter do not yet have the domestic financial capacity to address inequality. Precisely for this second group I would like to introduce the use of additional indicators, since these countries will not be able to solve the problem of inequality by themselves.

The evidence is clear: even though MICs should have enough resources to provide basic services for their population, we cannot ignore that around 70% of the world’s poor live in these countries. We cannot leave them to fend for themselves. We should assist governments in developing and implementing policies to better address the needs of their own poor. We should also provide support for civil society to help citizens and in particular vulnerable groups to raise their needs more effectively in dialogue with governments. For that reason the EU will continue to provide aid to civil society in all MICs.

Social and income inequality is a central theme, now and in the future, in the relationship between the EU and third countries as well as within the EU itself, as the economic crisis is increasing the poverty gap between Northern and Southern Europe. In our relationship with less-developed and low-income countries, we will continue to fight inequality and poverty through our development aid. And in our relationship with MICs we will have to find other ways to address this issue, e.g. through trade, knowledge exchange or providing micro credit for SMEs (small and medium enterprises). Although the MICs need to take responsibility for the fight against their own inequality, the EU should do its part and enable the poorest people to organize themselves so they can claim their rights and benefit from economic growth.