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Simon Maxwell

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Too much aid to middle income countries? The EU’s aid allocation conundrum.

 

The high share of aid provided to relatively better-off middle income countries is the biggest challenge to the aid record of the European Commission - and the biggest obstacle to maintaining political support, in the UK at least, for spending nearly a fifth of our aid through Brussels.

The bias to MICs is significant. The precise numbers depend on which source and year is used. However, the UK’s annual statistical report, Statistics in Development, has a comparative table (17) which gives the share of oda to low income countries from different donors. It shows that in 2009, only 46% of aid disbursed through European institutions was to low income countries, compared with a figure for all donors of 62%, and for the UK of 72%.

A crude extrapolation from these numbers suggests that every time the UK transfers £1 from the bilateral aid programme to Brussels, 26p is taken from low income countries and given to middle or upper income countries. Given that the UK spends about £1300m through Brussels each year, the transfer from LICs to MICs amounts to as much as £340m a year. For the ECEuropean Community as a whole, spending close to €11 bn euros on official development assistance in 2010, the equivalent figure is close to €3 bn per annum ‘lost’ to low income countries – assuming that the size of the aid budget would be unaffected if the geography changed.

Who are all these MICs receiving aid from the EC? There is one category of countries which have recently graduated to middle income status, and where aid programmes are relatively easily defensible: Laos, Pakistan and Vietnam fall into this category. There is another category which offers more of a challenge, or requires a different kind of argument. Europe's top ten aid recipients include Turkey, Serbia, Kosovo, and Morocco. Turkey and Serbia, at least, are at the upper end of the middle income bracket. Other recipients (in 2010) include Algeria, China, Colombia, Croatia, Trinidad and Tobago, and Tunisia: upper middle income countries all. Actually, Trinidad and Tobago is classified as a high income country, and does not appear on the latest DACDevelopment Assistance Committee (of the OECD) list. Full details of disbursements can be found in the annual report from the European Commission on development and external spending, the latest of which covers 2010 and was published in July 2011.

What can be said about this?

First, it is important to be clear that there is no sleight of hand. All the countries listed (with the exception of Trinidad and Tobago) qualify as eligible for official development assistance (oda) under DAC rules. A new list was approved in October 2011 and is reproduced for ease of reference here. It shows that countries eligible for oda must be least-developed, ‘other low income’, lower middle income, or upper middle income, using World Bank estimates of GNI per capita, though NB in nominal terms and not adjusted for purchasing power parity. It is notable that the middle income country category spans quite a range, from $US 1000 pc to $US 12,275 pc. It is also worth pointing out that quite a few least developed countries, a UN classification which tends to lag income status, and is also broader in scope, would otherwise qualify as middle income. In fact, 18 of the 48 least developed countries fall into the middle income country category. Anyway, the point here is that the DACDevelopment Assistance Committee (of the OECD) rules are applied correctly. We will come back later to the question of whether the DACDevelopment Assistance Committee (of the OECD) rules are correct.

Second, it is obvious from the list of middle income countries receiving aid from the ECEuropean Community that many are neighbourhood countries in Eastern Europe or the Mediterranean, funded not by development cooperation instruments, including the European Development Fund, but by the Neighbourhood Instrument or the Pre-Accession Instrument. This is the case for Turkey, for example. The Neighbourhood Instrument has some of the character of a development instrument, and much of it is oda eligible. However, the high share of MICs in development cooperation is to an extent an accident of DACDevelopment Assistance Committee (of the OECD) labelling.

Third, though, that does not exactly obviate the problem. British ministers present and defend the aid programme as being designed to tackle the worst of poverty in the poorest of countries. They are legally bound by the 2002 International Development Act to ensure that all development spending is designed to reduce poverty, which presumably applies to spending even in Neighbourhood and Pre-Accession countries. I would like to see that assumption tested! In addition, stakeholders in international development must feel exposed by the scale of spending in countries which hardly qualify as developing countries, and which could arguably afford to tackle poverty from their domestic budgets. We need to come back to that argument also.

Fourth, the neighbourhood apart, there is also a surprisingly large number of MICMiddle Income Country aid recipients funded from aid budgets proper, both the Development Cooperation Instrument and the European Development Fund. It is not easy to arrive at a breakdown of funding by instrument and income group, but the annual report shows that 41 upper middle income countries received aid from the ECEuropean Community in 2010, including many ACPAfrica, Caribbean and Pacific countries funded from the EDF and many Asian or Latin American countries funded from the Development Cooperation Instrument. Antigua, Barbados, Botswana and Mauritius fall into the first group; Argentina, Brazil and Malaysia into the second.

Now, Andris Piebalgs, the Development Commissioner, has recognised the problem and pledged to tackle it. His new policy paper, Agenda for Change, introduces the concept of ‘differentiated development partnerships’. It states specifically that ‘the EUEuropean Union must seek to target its resources where they are needed most to address poverty reduction and where they could have greatest impact.  Grant-based aid should not feature in geographic cooperation with more advanced developing countries already on sustained growth paths and/or able to generate enough own resources’.

In December 2011, the Commission published its proposals for the new financial regulations which will govern EUEuropean Union external spending for the period 2014-2020, including both the DCI and the EDF. There is no commitment to differentiation in the EDF proposal, but the DCI proposal states that ‘in principle, high income, upper middle income and other large middle income countries, which are on a sustainable development path and/or have access to large domestic and external resources to finance their own development strategies, would graduate out of bilateral aid programmes’. It goes on to say that ‘partner countries representing more than 1% of the world's GDPGross Domestic Product and/or upper middle income countries according to the list of recipients of Official Development Aid (ODA) of the OECD/DAC are in principle excluded; however, additional criteria relating to their need and capacity is used, such as Human Development Index, the Economic Vulnerability Index and aid dependency, as well as economic growth and foreign direct investment.’

Practically, this means that 19 previous recipients of aid are excluded from so-called ‘bilateral’ programmes, though they may continue to receive aid from the DCI for regional or thematic programmes. The 19 are listed in Figure 2. Together, they received some €350m in 2020, including for regional and thematic programmes, and humanitarian aid, so this is a modest step in the direction of redistribution, just 12% of the potential transfer.

Figure 2

List of countries proposed to be excluded from bilateral ECEuropean Community aid programmes in 2014-20

Argentina

Brazil

Chile

Colombia

Costa Rica

Ecuador

Mexico

Panama

Peru

Uruguay

Venezuela

China

India

Indonesia

Malaysia

Maldives

Thailand

Kazakhstan

Iran

 

 

How serious a problem is this? The answer depends partly on whether aid to middle income countries can be justified, a much-debated topic, which Jonathan Glennie explored in an ODIOverseas Development Institute (London) Working Paper. Some people feel that aid should be provided to poor people in so-called developing countries, pretty well regardless of their level of income. Certainly, they would argue for support to anti-poverty programmes in lower middle income countries. They would also argue for support to successful MICs because of the spillover effects to poorer countries in their regions.

There is indeed a case for being sensible about the arbitrary nature of dividing lines, and also recognising that middle income countries sometimes slip back below the poverty line. However, most observers would accept that as countries become richer, grant aid should be phased out and loans and other forms of aid phased in. ‘Blending’ is the current buzz-word, a topic on which Mikaela Gavas led work at ODI. This approach is consistent with EUEuropean Union thinking, and was also an implicit theme of the aid effectiveness meeting in Busan.

At the same time, a carefully calibrated aid approach to countries at different levels of development does not recognise the political imperative behind EUEuropean Union funding in the neighbourhood. Does anyone really think that ECEuropean Community pre-accession and neighbourhood budgets are read off from World Bank calculations of GNI per head and the DACDevelopment Assistance Committee (of the OECD) list of aid recipients? Does anyone think they should be? I thought not.

For British ministers, it may be an inconvenience that aid is ‘diverted’ from poor countries in the developing world to less poor countries in the neighbourhood. For some others, the opposite may be the case. For the EU-12, for example, the new Member States, it is an advantage of aid spending that it helps to support countries in their neighbourhood, like Moldova or Belarus. The same is true for many Member States, both old and new, with respect to the Mediterranean. The EUEuropean Union has made ambitious aid pledges, including to reach 0.7% of GNI by 2015. It might well be that this pledge would not survive if neighbourhood funding had to be provided in addition to funding developing countries. There might even be an effect on the UK Government’s willingness to provide aid to traditional recipients, if it were asked to contribute to additional budgets, as it would surely want to do, to support stabilisation in former Yugoslavia or the Arab Spring.

That makes one obvious recommendation look shaky: to define the problem out of existence, by eliminating all Upper Middle Income Countries from the list of DACDevelopment Assistance Committee (of the OECD) recipients. There is probably a good case for that, actually, but it would have to be approached with great care, and in tandem with cast-iron commitments not to cut aid overall. Otherwise, it would be self-defeating. I’d be interested in views on that subject.

The alternative strategy is for donors that really want to concentrate on poor countries to vote, somehow, with their feet – in other words, to allocate resources so as to maximise the impact on poverty. Such an approach was implicit in the UK’s Multilateral Aid Review, completed in 2011, which ranked the EDF and the EC’s humanitarian work as ‘strong’, but the budget as ‘weak’, largely because of its lower focus on poor countries.

What position should the UK take in the current negotiation over the Multi-Annual Financial Framework 2014-20? Some would probably argue that the answer is to minimise the flow of money through Brussels, and spend the aid budget instead either bilaterally or through the UN or the World Bank. That option would ignore the good work done by the development and humanitarian instruments of the European Commission. It would also reduce diversity and contestability in the overall aid architecture.

An alternative is to minimise the amount of money going to less desirable parts of the ECEuropean Community programme and maximise parts going to the more desirable. From a UK perspective, that would mean arguing for smaller neighbourhood and pre-accession instruments, and transferring money instead to development instruments, including the EDF. Such a strategy would be feasible, but, taken to extremes, (a) would probably lose friends among countries concerned for the neighbourhood, and/or (b) open the UK to demands for additional funding for the neighbourhood. It is also probably true that the ECEuropean Community has a comparative advantage in acting for Member States in the European neighbourhood.

Perhaps the answer is not to take the strategy to extremes. It would be possible, at the margin, to rebalance the ECEuropean Community external budget, favouring the EDF and the DCI, and encouraging Andris Piebalgs to move faster in the direction of differentiation, across the programme (including vis a vis the ACP).

In this connection, it is notable that the Commission proposes to increase the DCI by 19% in real terms, but the EDF by only 13%. That seems the wrong way round. The EDF is outside the budget, and therefore perhaps easier to increase, given fiscal stringency. Achieving differentiation within the EDF would be a challenge, given the contractual nature of the Cotonou Agreement, but should at least be proposed.

A final alternative is to revert to an idea I proposed back in 2006, which is to create a new, supplementary and voluntary MDG Fund for the EU, devoted to low and low and middle income countries, funded from aid programmes, poverty-focused, and subject to regular replenishment, a bit like the IDA. Would that not solve the problem?

In the meantime, it will not be surprising if the UK’s International Development Select Committee takes a hard look at the allocation of ECEuropean Community development funds, and at the differentiation agenda.

Comments  

# governance and the bottom billionGuest 2012-01-29 08:16
A lot of EU aid goes to governance programmes. Democratic governance is not aimed at direct poverty relief, but seems to have enormous benefits in the long run, leading to diminishing the gap between rich an poor, and long term sustainable growth.

Indeed, the sole focus on the poor in the short term might be not the best long term solution. Don't forget moreover that the gap between rich and poor in the MICs is so high that there can be argued that the bottom billion actually lie in the MICs.
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# Sumner, Glassman and Piebalgs debating this issueSimon Maxwell 2012-01-30 17:13
Hardly was the ink dry on this, so to speak, than I discovered that Andris Piebalgs had responded to a piece on the Guardian website by Andy Sumner and Amanda Glassman from the Centre for Global Development.

Andy and Amanda urge the donors not to abandon MICs, though accepting that the future may be less about money than exerting influence. A key paragraph reads as follows:

'Donors could develop a sliding scale on financial contributions, but it's not only about money. There are plenty of good things they could do in MICs at a reasonable price. They could support purchasing clubs through existing multilaterals like Unicef in order to achieve economies of scale in the purchase of health products like bed nets and vaccines. They could create incentives and provide direct support for more regular, high-quality measurement of births and deaths, allowing planners to dimension the scope of health problems and identify better solutions. They could support the thinktanks and public budget watchdogs that assess government commitment to reducing poverty and improving health. They could develop national debates with the emergent middle classes on why paying more tax might be in everyone's interest'.

See guardian.co.uk/.../...

Andris Piebalgs defends aid to least developed countries. With respect to MICs, he argues as follows:

'It is no secret that global challenges such as HIV, climate change, inequalities or a lack of growth still hamper development of many middle income countries and are a major obstacle to alleviating poverty. Therefore in our Agenda for Change, we suggest to develop a cooperation based on new partnerships with them. We also proposed to create a new Partnership Instrument for 2014-2020, to support activities which could benefit to both the EU and our partners, with over €1 billion.
That is not all. Additionally, instead of bilateral aid, we proposed to develop a relationship through our thematic programmes which systematically takes account of needs and resources in these countries. We are seeking to invest €6.3 billion from the next EU budget in a “global public goods” programme which will tackle the greatest global challenges flexibly. It will focus on climate change, environment, sustainable energy, food security and migration, as well as on human development, including healthcare, education and gender equality.
The EU will also increase its support to civil society organisations (CSOs), in recognition of the fact that they, together with local authorities are best placed to understand people’s needs and respond with effective help. Not to mention, that they are a cornerstone of a free and democratic society.
Our flexibility will come in part from allowing these programmes to go beyond the local to tackle regional issues as well where necessary. The food crisis in the Horn of Africa and access to electricity in sub-Saharan Africa are regional problems requiring regional solutions. Thanks to this smart and comprehensive approach, we aim to achieve greater results.
Leveraging resources
There are other ways in which we can get more from our aid. Take India, for instance. In 2011, India’s GDP amounted to some $4.5 trillion, so even if the Commission had invested every cent of the €10 billion of aid at its disposal that year, its effects would have been very limited. That said, where appropriate, we can deploy financial mechanisms such as blending of loans and grants to multiply our resources. Through such blending mechanisms, we can support the projects that the private sector would normally be reluctant to finance alone– the difference being that with our grant a bank would be willing to issue a loan. I believe that this offers a valuable way to address the lack of infrastructure such as electricity grids, which are indispensible for development but often too expensive for the donors to fund. I recently inaugurated the site of the future solar power station in Burkina Faso, financed through a mix of EU donors pooling grants and loans. This will be the largest solar power station in Africa which will provide access to clean electricity to the country and the region.'

See blogs.ec.europa.eu/.../...

Your views?
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# RE: Too much aid to middle income countries? The EU’s aid allocation conundrumGuest 2012-02-01 14:13
Simon, following on from your comments above - here's the reply I posted for info to Andris:

Thanks for replying to our Guardian Global Development blog.

1. I’m left wondering if you largely agree with our comments from what you say here.

2. Your researchers need to check their facts beyond Gap Minder – I’d suggest checking the data from UNCTAD. There are about 350-400m extreme poor ($1.25) in LDCs not 800m.

The most sophisticated estimate is for 2005 (see page 23) is this one:

unctad.org/.../...

And estimates have been updated to 2007 here:
unctad.org/.../...
Of course this may have risen over the last three years perhaps but certainly not to the levels you’re suggesting.

3. This means that somewhere in the range of a third of the world’s poor are in LDCs as UNCTAD notes in the second link above.

4. It is also worth remembering a third of LDCs are actually surprisingly enough middle-income countries (because as you probably know the LDC category is very difficult to get out of). This blog here also may be of interest:

globaldashboard.org/.../...

Regards,

Andy Sumner

Fellow, Institute of Development Studies at the University of Sussex and Centre for Global Development, Washington DC.
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# RE: Too much aid to middle income countries? The EU’s aid allocation conundrumGuest 2012-02-01 14:31
A few years ago we advised the UK government not to close its programme in Latin America. Not because Latin America needed funds (let's be honest, we do not, and neither do many of the low income countries that get it instead) but because 1) British aid was helping to champion original and powerful ideas that would have otherwise not have been studied (politics of policies, social exclusion, identity of indigenous groups, etc.) and 2) because Britain could learn from Latin America -and apply those lessons in Africa and elsewhere. We've been through most things already.

The issue with this debate is not whether MICS deserve aid or not. The problem is that we are using a category that means absolutely nothing. Chile, Peru, China, and Iran could not be more different from each other. The approach that the EC (and DFID, and USAID, and everyone else) takes to engage with each ought to be different. A single policy for all would be, in my mind, evidence of incompetence on their part. Or laziness.

The same is true for low income countries. Saying that all Aid will be spent in all countries under a GDP threshold is equally lazy. Worst still is setting spend targets before assessing their absorptive capacity. It is simply bad practice. No corporation in the world would decide how much to invest in a new market before it assessed its capacity.

Finally, some middle income countries or emerging economies could be seen as partners in the fight against poverty elsewhere. Latin American researchers and consultants are not only cheaper but also better qualified than most their European and American counterparts. They are also more familiar with the challenges that African states face. Why not use them more. This new relationship is win win: more funds to do more research, to train more policymakers and researchers, to directly support developing and poor countries, to share lessons more directly, etc.
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