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Simon Maxwell

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brokeneurosmallRe-thinking Europe: what development can offer

There's a conversation we often have in development circles about what 'Europe' can contribute to our objectives. We debate comparative advantage and cost-effectiveness, cooperation and consolidation, complementarity and coherence. Sometimes the case is easy to make - how many donor missions does Malawi really need? Sometimes - 'shall we send troops to Libya?' - the arguments are harder, and harder-edged.

Suddenly, however, the conversation can to be turned on its head. With Europe in financial and perhaps political crisis, a more useful question might be what development can contribute to our European objectives - or perhaps better, so as not to prejudge outcomes, our European perspectives? There are three answers.

The first answer is that we recognise the structural adjustment crisis faced by the European periphery, and have some options to offer from development experience. Reading about Greece or Italy or Spain or Ireland today reminds me strongly of reading about and working in African countries in the mid-1980s - similarly crippled by debt crises, and similarly subject to external monitoring and interference. Rigorous monetarist discipline not only stopped growth in its tracks, but also undermined human welfare and, in many cases, destroyed the social contract. Progressive economists in the 1980s coalesced around the idea of Adjustment With a Human Face - accepting the need for macro-economic stabilisation and structural reform, but also insisting on the need to protect the welfare of the poorest and the provision of basic social services. Pioneering analysis by people like Richard Jolly, Frances Stewart and Andrea Cornia led eventually to initiatives like an emphasis on the social dimensions of adjustment, and to new financing options by the likes of the World Bank. Arguably, the re-evaluation of structural adjustment underpinned both UNDP's work on human development, launched in the Human Development Report of 1990, and the World Bank's re-discovery of poverty, in the World Development Report of 1990. In turn, these contributed to poverty-focused debt relief initiatives in the 1990s, and to the introduction of Poverty Reduction Strategy Papers. And is it fanciful to draw a line between the experience of structural adjustment and the adoption of the Millennium Development Goals?

I don't work on domestic European policy, but it does seem to me that there are some lessons here, at least some general principles. Structural adjustment is a necessary process but has a high human cost. Poor people need to be supported as consumers, but also as producers. A high level of participation is required, to underpin ownership and legitimacy. The international community has to cohere around high-level human development goals.  And financing is key, including if appropriate in the form of debt relief. There is, it goes without saying, a great deal of international analysis of how to manage the fall-out from the 2008 financial crisis, making similar points. I've written about this elsewhere, originally for the Commonwealth Secretariat.

On financing, I can't resist making a point which is not exactly taken from development studies, but which draws on my very limited reading in the area of currency unions and fiscal transfers - namely that they don't often work unless there are substantial transfers between regions or jurisdictions, to manage asymmetirc shocks, but also to redistribute between rich and poor regions.  The German constitution, for example, guarantees equal standards of service provision between the various Lander - and allocates tax revenue accordingly. The euro-zone has no such ambition, or rule.

The paper on the US as a monetary union, prepared for Gordon Brown's review of the case for joining (or, better, not joining) the euro illustrates the argument. It emphasises the importance of federal transfers, as well as flexible labour markets. Experience in 2008 reinforces the point, with President Obama having agreed a number of high value fiscal stimulus packages, initially for as much as $US 787 bn under the American Recovery and Reinvestment Act.

The OECDOrganisation for Economic Cooperation and Development also has an interesting paper on fiscal equalisation, reviewing the experience of countries as varied as Australia, Canada and Germany. On average, these countries assign 2% of GNPGross National Product to transfers, to manage asymmetric shocks and redistribute from rich to poor.

The GDP of the euro area is currently about 9 trn euros, so 2% would amount to about 180 bn euros. By contrast, current stuctural funds amount to about 30bn euros, some of which goes to the poorest regions in the poorest countries, but some of which goes to poor regions in richer countries. Further, structural funds support production, not consumption. Thus, the gap between what is needed and available is at least 150 bn euros per year.

Does it not follow that attempts to save the euro need to focus not just on the need for fiscal discipline and structural reform (= structural adjustment), but also on the essential role of large-scale transfers? An extra 150bn euros a year is not trivial in the context of an EUEuropean Union budget of some 140 bn euro, but that is only because the EUEuropean Union budget is so small in relation to EUEuropean Union GDP (capped at 1%) and to Government spending. Tax-payers in richer euro countries, please take note.

A second contribution to current re-thinking is the lesson that incremental change is less risky, more sustainable and more effective than high-blown grand projects carried out without popular support. Such is the case with the EU's development effort, which has been and is on a trajectory of gradual improvement. It is now - how amazing is that? - well-rated even by former critics like DFID.

There was a time when Clare Short thought EUEuropean Union aid so poor that she threatened to withdraw. But no longer - apparently - is the quality of the programme poor, the rate of disbursement slow and the bureaucracy desperately slow and over-centralised. DFID's Multilateral Aid Review has told us that.

We should not exaggerate. The journey has been too slow, and there is still work to do. Too much oda, for example, is still spent in middle income countries. Still, Andris Piebalgs, the development commissioner, has made steady progress over the past two years in re-shaping policy and re-organising the administration. I have commented elsewhere, with colleagues, on the new policy, Agenda for Change, and on the various reforms. Most recently, the Commission has issued detailed proposals for the regulations governing spending when the new Multi-Annual Financial Framework comes into place in 2014. Our verdict - not bad.

Kristalina Geogieva is another who is at the cutting edge of her field of humanitarian aid. And didn't Connie Hedegaard do well at the climate talks in Copenhagen, promoting the EU road-map towards a new climate regime?

Is this just about leadership, and the politics of cooperation? It is about those things, but also about having a common interest in effective development cooperation. The single market is a driver of cooperation in trade and, up to a point, in the field of climate. In aid, there are shared interests in reducing transactions costs and in managing goegraphical dispersion. It is an advantage for DFID, for example, that ECHOEuropean Community Humanitarian Office can be active on the ground when emergencies take place in countries where DFIDDepartment for International Development has no bilateral programme and no programme infrastructure. Similarly, there are areas of work - energy might be one - where Devco has expertise or brings a level of resources which DFIDDepartment for International Development might find it hard to mobilise. The EUEuropean Union also has the capacity to mobilise a variety of resources which other multilateral actors do not - for example, it has greater credibility on human rights and civil liberties than the World Bank, more money to disburse in post-conflict situations than the UN.

As a re-thinking of European partnerships is underway, it is interesting to ask whether Europe's comparative advantage in development cooperation is likely to grow or shrink. In other words, will we find Europe more or less useful in the years ahead?

We examined this question at a session I moderated at the European Development Days in Warsaw on 16 December. On the panel were Andris Piebalgs, the development Commissioner, and five others: Baroness Lindsay Northover, Government spokesperson from the UK parliament; Alain Henri, Chef de Cabinet to the French development minister; Tertius Zongo, a former Prime Minister of Burkina Faso; Paul Engel, Director of ECDPM in the Netherlands (and a member of our European Think-Tanks Group); and Patrick Guillaumont, President of FERDI, the leading French research centre on economic development.

The main take-away for me was that the development agenda is undergoing a radical shift, to embrace not only traditional concerns like the MDGs, but also the big global challenges. I asked all the members of the audience to list their top six problems and/or opportunities in development, and then asked the panel to share theirs. Food security, featured, of course, and water and sanitation, and energy, and health. Poverty was mentioned, and, eventually, the MDGs. These are all the traditional core of development work. But it was striking that the panel members focused on different problems: managing the roller-coaster of globalisation; climate change; political liberalisation; and the opportunities presented by the transition to a green economy. Several of them talked about inequality and social inclusion, locally and nationally, but also internationally. How could we claim success when so many were excluded from global progress, and so many vulnerable to shocks?  New thinking was required, a new kind of global engagement, including with new powers and emerging economies. I agreed. This is an argument I have been making myself, for example in Kapuscinski lectures in Hungary, Malta, Bulgaria and Lithuania. I do hope I did not ventriloquise the answer I wanted. I don't think so.

The next question we discussed was about the role of Europe in these new global issues. It was not axiomatic, after all, that the answer to every problem should be European. Here, I have to say the answers we received, including from the audience, were less clear-cut. People talked about the need for the EUEuropean Union to regulate its own affairs, including the payment of tax by its own companies. There was a lot of talk about the value of increased cooperation in aid management (with a good airing for the Commission's enthusiasm for joint programming). 'Differentiation' featured, in the sense of managing new partnerships with middle income countries and the big, new powers. There was also quite a discussion about how the Commission could support democratisation, in its various manifestations - particularly in countries where human rights were at risk or civil society was suppressed. Not easy, and sometimes not appropriate either, as external actors have found in countries like Libya, Zimbabwe, Iraq or Afghanistan.

Panellist and participants offered rather less on managing the global economy, or on brokering a deal to tackle climate change. These ought to be on the agenda, not just in the EU, but also at international gatherings like the G20. I've argued before that it is counter-productive to ghettoise issues affecting developing countries in a so-called development agenda, while the grown-ups, so to speak, discuss the regulation of banks or the coordination of fiscal stimulus. Climate change definitely ought to be visibly on the agenda of the G20 - and of the development team in the EU. Why, I wonder, has there not been more generous funding of the Global Climate Change Alliance, the EU's vehicle for climate compatible development?

We might have developed these arguments if we had had more time, but we did not. Instead, I gave a closing summary which sort of pretended we had. Roughly speaking, and it was neither as coherent or as complete as this:

  • First, the world is undergoing deep transformations, which will accelerate as climate change takes hold. There are huge risks, but also extraordinary opportunities to build a global society which is more equal, sustainable and secure.
  • Second, a better world can only be achieved though collective action, by nations and their peoples working together. No single country has the reach or authority to manage global change in a multi-polar work. Multilateralism is the necessary instrument of our time.
  • Third, the European Union offers many advantages in multilateral space. It is not the only actor, nor always the most appropriate - but when mobilised can offer political, financial and human resources that others cannot.
  • Fourth, the struggle for poverty reduction and human development cannot be abandoned. In this connection, the Development Commissioner's Agenda for Change provides the roadmap, and his institutional reforms provide a platform for continued improvement in the quality of aid - and delineate areas of comparative advantage which will play well in the negotiations now underway over the Multi-Annual Financial Framework.
  • Finally, the time is coming when it will be necessary to tune up for the next campaign, on wider development issues and global challenges. These will in due course dominate the development agenda, probably sooner than we think.

If these conclusions make sense, they suggest a third contribution that development can make to current thinking: demonstrating that there are some things the EUEuropean Union can actually do quite well. Indeed, there are some objectives dear to Member State ministers that can only be achieved through the EU. That may be a perspective worth hanging on to.

Vote on whether euro survival requires fiscal transfers from rich to poor countries here.

Image copyright Telegraph

Comments  

# RE: Re-thinking Europe: what development can offerSimon Maxwell 2012-01-27 17:27
Kunibert Raffa commented on this piece in a discussion group I recommend, sites.google.com/.../.... I've replied, so check that site to see what response I get!


Dear colleagues:

Simon’s contribution makes me write these remarks, necessary in my view to correct what appears to me to be a misrepresentati on of the issue.

First, may I just quote from the executive summary of the UK study quoted by Simon (.../united_states_as_monetary_ union.htm
):

“Overall, fiscal policy appears to provide as much, if not more, assistance to regional adjustment in Europe than in the US”

and
“Individual US states are not prevented by any formal institutional framework from running fiscal deficits. Nor is there any harmonisation of state income, corporate, sales or excise taxes in the US. The evidence suggests that even with highly mobile capital, states retain some flexibility to run independent fiscal policies – although in practice almost all US states choose to follow a form of balanced budget rule on an annual basis.” (which ones precisely is discussed, by the way, and balanced usually does not include the whole budget!)

and

“This suggests that perhaps the most important lesson from the US experience is that a key feature of a successful monetary union is a high degree of confidence that, should difficulties occur, both the economic and institutional structures of the monetary union have the capacity to evolve and meet emerging challenges.”

Confidence has been and is being lost by our politicians behaving like Goofy – or rather (sorry Goofy!) not at that high intellectual level.

By contrast, googling “transfer” does not yield one single hit in the ex-sum. I thus conclude that transfers do not play as important a role as implied by Simon.

Re. Transfers one should also mention that the Union does not bail out States and that the allocation of tax revenue in Germany is not fully correctly described. In Germany as in Austria, certain – e.g. excise – taxes are collected by one actor only – the federation. However, since States and municipalities are entitled to shares of this tax there has to be a distribution of revenue. In the US it is different, as anyone knows who ever has gone through the inconvenience of not knowing what a purchased article really costs until payment, as State taxes and/or municipal taxes are added to the “price” (sometimes at rates such as 7.43% which make calculating easy). To avoid this consumer hostile arrangement – consumers usually want to know what they pay gross, rather than doing half the accounting for the seller as well – that has always reminded me of the late Soviet Union, governments in European federal countries, such as the two mentioned, have taken the task or nuisance of distributing upon themselves, a consumer friendly attitude that necessitates some form of distribution. Clearly these are not transfers!

Thus, in Germany income taxes, corporation tax and VAT have to be divided between the Federation, the Laender and the municipalities, but are only levied by ONE institution.
If - pursuant to the German Constitution – levying, e.g., excise taxes is the competence of the Federation (US = Union) but Laender and municipalities have a right to parts of the revenue this has to be respected. It is, and this is not the transfer Simon speaks about, but a sharing of common income. In addition, the German Constitution also knows real transfers, payments to Laender that are – according to legally defined indices (Ausgleichsmess zahl and Finanzkraftmess zahl) – below the set standard. They receive comparatively limited transfers. One should only count these rather than all the money moved due to constitutional specificities.

Re. the US, federal transfers are often used in a mind boggling way. A recent Economist article wrote correctly “From 1990 to 2009, the federal government SPENT $1.44 trillion in Virginia but collected less than $850 billion in taxes, a gap of over $590 billion.”
Virginia is by far the main receiver, simply because federal agencies are located there for geographically obvious reasons. I dimly recall one – a three letter word starting with a C and ending with an A; an I seems to be in there somewhere too - as one costly example. But there are other similar payments in other States, FBI, immigration officials, coast guard etc. This means just that federal employees are being paid – it is not a transfer in any proper sense, especially not to the State where these employees happen to live.

There are fiscal transfers from the federal government directly into state budgets, to help them fulfil FEDERAL mandates. The Union injects federal money into state programmes directly. The American Recovery and Reinvestment Act (ARRA) of 2009, for example, provided large amounts of support to the States, that nevertheless pales in comparison to the money already heaped upon poor Greece, or rather channelled into the pockets of speculators.

While there are few transfer to States, there are transfers to individuals entitled to federal payments, such as Medicaid. However, real inter-governmen tal transfers (union-states in the US) are well below the level of intra-EU transfers to poor members.

S&P justified its recent downgrading of France inter alia as follows:

’In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery." As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.’

In other words, our governments are implementing a wrong policy, destroying the economy.
John puts his finger on that. Further austerity in Germany (or Austria) is not unlikely to enlarge the problem further as problem debt countries are once again incapable of outdoing Germany. Needless to say that this point is not mentioned in the media or by politicians at all – it would run counter to the neoliberal revolution of hitting the poor favoured by the EU. Also, demanding EU supervision of member budgets would finally kill democracy in Europe by removing the most basic right of elected parliamentarian s, voting on the budget, from them in favour of unelected bureaucrats in Brussels. It is a bit of a historical bad joke that Germany is once again in the forefront in destroying democracy in Europe.

There is one last remark necessary: apparently what S&P wants is full bail-outs of investors by transfers to poor countries, i.e. institutionalis ing speculator welfare and finally killing the market. A much better – and in fact the only – alternative would be to let countries such as Greece go bankrupt (like US States) and take investors the risk for which they charged already when lending. To be brief: the solution – with due apologies for my sympathy with my own proposal – is applying a proper, Rule of law abiding and democratic insolvency procedure – cf. on Greece homepage.univie.ac.at/.../... first four links.

Had the EU at least implemented the proposal by Gros & Mayer I comment upon – a 50% haircut plus guarantees for the rest by the rich EU members – Greece would be afloat again with 60% debt-GDP. Clowning on and bungling on the EU and the IMF have, deteriorated the situation that far that the 50% (“voluntary”) haircut of the private sector only – should it really come about - is hoped to bring Greece back to 120% debt-GDP in 2020! If – as the UK document Simon quotes states - the US “key feature of a successful monetary union is a high degree of confidence”, the reason for the crisis seems clear. This is absent in Europe – due to the way our politicians are clowning around.

Best

Kuni


--
Kunibert Raffer
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