Memorandum submitted by Professor Kunibert
Raffer, Department of Economics, University of Austria
With the innovations of Lome I the EEC introduced
a new and innovative form of North-South co-operation, establishing
strong intellectual leadership in development co-operation. Unfortunately,
this unique element of innovations has been pushed back by the
following treaties, increasingly making the EU a donor like any
other. To regain this intellectual leadership in development co-operation
the EU should again be prepared to implement ideas increasing
the element of partnership and the relevance of the Rule of Law
and of the market mechanism in North-South relations. The present
drive to reform development policy would be an excellent starting
point. On this basis the following proposalswhich strongly
draw on Raffer & Singer 1996to increase the quality
of development co-operation substantially are made:
The Commission (2000, p.14) rightly stresses
that the Community's aid system is too complex, and that financial
control has to be simplified. It also strongly called for ownership.
The best and simplest way to do so would be copying a most successful
innovation of the Marshall Plan: self-monitoring by recipients.
The US encouraged Europeans to monitor one another's performance.
Each Western European government submitted a plan which was inspected,
vetted and monitored by other European recipient governments in
the OEEC (Organisation for European Economic Co-operation). Control
by peers is also a principle advocated in business management.
The EU should introduce this form of international co-operation,
first recommended by Paul Streeten (1994), treating their partners
precisely as they were once treated as recipients. This would
solve many EU-problems, such as too high complexity and understaffing.
Of course, given the present state of some countries, not all
countries could immediately participate. Some would need help
to do so, but the success in Europe strongly suggests trying this
model in the South as well.
Self-monitoring and joint requests to the EU
should and could be further enhanced by integrating NGOs into
the process. Present institutional contacts between the EU and
NGOs could serve as a starting point. Public discussions including
affected people, open information policies and thus strong transparency
should be encouraged. This model would fulfil all demands of good
governance, democracy and transparency presently voiced by donors
in a democratic and transparent way. To overcome the problems
of aid fatigue, lack of `ownership' by recipients but also (sometimes)
of mutual distrust, an emulation of this principle of Marshall
aid is advocated. Country groups could get together mostly according
to geographical but, if this should be more advisable, also according
to other, e.g. economic criteria.
2. REMOVING THE
As long as developing economies remain crushed
by unsustainable debts any sensible economic activity is severely
impeded and all aid efforts are unlikely to succeed. Removing
the debt overhang and restoring the economic viability of debtor
economies is thus a precondition for the comprehensive approach
to development and poverty reduction demanded by the Commission.
It is necessary to achieve the Commission's (2000, p.5) goal to
`support action that would enable developing countries to fight
poverty themselves'. As long as poor countries have to pay more
to service their debts than is available for measures against
poverty one key element of EU policy, poverty reduction, is likely
to remain impossible. The debt overhang impedes private investment
as well. It is thus also at odds with the goal of promoting the
development of the private sector. Already in 1996 the Commission
(1996, p.35) stressed the importance of progress in debt management,
speaking of the `bankruptcy of many African states' (ibid.,
p.5), declaring: `In the light of the enormity of the foreign
debt problem facing many ACP countries, it is hard to turn a blind
eye to international initiatives in this area.' (ibid.,
p.57) Unfortunately, the Commission managed.
Substantial shares of present debts exist only
because of prolonged, unsuccessful debt management by official
creditors refusing necessary debt relief over years. This increased
debt burden is creditor caused damage which poor people in the
South have to pay for. The principle of coherence between trade
and development policies (Art. 130v of the Maastricht Treaty)
demands that the problem of unsustainable debts be resolved. Debtor
countries' debt service has to be brought in line with their abilities
to pay under present, protectionist conditions, while safeguarding
a minimum of human dignity of the poorest and most vulnerable.
The fairest and economically most sensible way to do so would
be the internationalisation of Chapter 9 of US insolvency laws
(cf. Raffer & Singer 1996). It deals with debtors having governmental
powers, and protects those affected by the composition plan, giving
them a right to be heard. Both the indebted municipality's employees
and tax payers expected to pay more have the opportunity to object.
Creditors are to receive what can be reasonably expected under
the circumstances, and humane living standards of people living
in the indebted municipality are protected. It could be applied
internationally at once with very minor changes. Thus a neutral
court of arbitrationas usual in international lawwould
have to replace national courts to avoid decisions influenced
by national interests of creditor or debtor countries. Each side
nominates an equal number of arbitrators, who in turn elect one
more member to reach an uneven number. Ideally, the number of
arbitrators should not exceed five. The interests of the population
affected by the plan could be defended by trade unions, grassroots
organisations, religious or non-religious NGOs, or international
organisations such as UNICEF. This would finally implement the
rule of law in international relations, introduce sound economic
principles and protect a minimum of human dignity of the population
in indebted countries. As the example of Germany shows, whose
debts were halved in present value terms by the London Accord
of 1953, de facto insolvency does not harm a country's economic
future. It is a precondition for successful development efforts.
Debtor protection is one of the two essential
features of insolvency presently denied to the poorest. In a situation
of overindebtedness the right of creditors to interest and repayments
collides and the principle recognised generally (not only in the
case of loans) by all civilised legal systems that no one must
be forced to fulfil contracts if that leads to inhumane distress,
endangers one's life or health, or violates human dignity. Briefly
put, most debtors cannot be forced to starve themselves or starve
their children to be able to pay. Developing countries, by contrast,
are forced to do so. The other is the most fundamental principle
of the Rule of Law: that one must not be judge in one's own cause,
as creditor countriesincluding EU-memberspresently
are. Both human rights and the Rule of Law would thus demand a
fair and open arbitration process modelled after US Chapter 9
to create the preconditions for development, as also demanded
by the Jubilee 2000 movement. An international insolvency procedure
for states is also a necessary part of a meaningful international
3. COHERENCE AND
Development co-operation has suffered from what
is technically referred to as policy incoherence or inconsistency.
Subsidised EU beef exports to West Africa undermining EU aid to
support local beef production is but the best known example. The
Maastricht Treaty demands consistency. Art.15a of Lome IV demanded
coherence. The Green Paper repeatedly invoked the importance of
this principle (e.g. Commission 1996, p.3;4;14;41;45f). Nevertheless
the Commission (1996, p.46) refused expressly and steadfastly
any commitment to coherent and consistent policies:
`consistency ... that is the external effects
of policies other than development cooperation, can in any case
never become an international commitment on the part of the Community.
... consistency remains a matter of judgement. The Treaty of the
European Union answers these concerns by imposing the principle
of consistency, particularly with regard to its external activities
(Article C of the Treaty) and explicitly with regard to development
cooperation (Article 130v).'
Although it is argued that the Maastricht Treaty
must be respected to the digit behind the decimal point in the
case of policies politically justified by the common currency,
and honouring WTO commitments has often been cited as necessary,
the Commission has no intention whatsoever to obey the Maastricht
Treaty when it comes to aid (cf. also ibid., p.ix). The
Commission's (2000, p.13) recent Communication repeats the view
that legal obligations may or may not be obeyed. European taxpayers'
money is likely to be wasted for projects whose success will be
destroyed by taxpayers' money as in the past.
If damage is inflicted by incoherent policies
countries suffering from these effects must be entitled to full
compensation. Offsetting such negative effects must be an obligation,
rather than a mere possibility (cf. Commission 2000, p.13: `may
be devised'). It is mandatory to make the Commission respect legal
obligations vis-a"-vis poor countries as well. The credibility
of the EU's advocacy of the Rule of Law as a necessary and useful
principle would be extremely strengthened if this principle were
applied by the Commission too.
4. FINANCIAL ACCOUNTABILITY
It is present practice to let recipients pay
for failures made by the staff of donors or International Financial
Institutions (IFIs), even in cases of gross negligence, where
a firm in an OECD-country could successfully sue its consultant
for damages. This exemption from economic and legal consequences
leads to failed projects or programmes calling for new ones to
repair damages, often financed by new loans from the same source.
Particularly in the case of IFIs. IFI-flops thus create IFI-jobs.
This perverted incentive system creates systemic inefficiencies
Because of the predominance of grants in Lome
and in the post-Lome Convention this problem is, of course, much
less pronounced than e.g. in the case of IFIs. Nevertheless the
EU could play the role of the innovator, bringing simple but necessary
market mechanisms and the Rule of Law to bear. This could be done
by introducing a similar liability for advice given together with
money as in the case of private consulting firms that are liable
to compensate damages their clients if they acted negligently.
Setting a precedent for all donors and IFIs the EU could improve
development co-operation dramatically, and might eventually convince
others to follow this example.
This market element would act as an incentive
to perform better and protect the poor from damages done by ill-conceived
projects. Victims of development projects must be enabled to receive
damage compensation. While donors (including the EU) and IFIs
keenly preach human rights or respect of private property they
have financed projects violating these values (e.g. by forced
resettlements without proper compensation). Often, the victims
were vulnerable groups or indigenous people. The right of victims
to make donors accountable for what they facilitate is needed
to improve the lot of the poor, whose human rights and sometimes
whose lives are too often not respected by their governments as
well as their governments' public financiers. Doing so the EU
would play a pioneering role in finally bringing the DAC's important
principles of accountability and the Rule of Law into development
co-operation, granting the victims of development co-operation
the rights any decent legal system confers on all human beings.
Real accountability would certainly increase the quality of projects.
5. STABILISING COMMODITY
Sharp fluctuations of commodity export revenues
expose many developing countries to shocks comparable to if not
worse than the effects of the oil crises of the 1970s on OECD
countries. Strongly concentrated on commodity exports, the poorest
countries are particularly adversely affected. Lome I knew a mechanism
to deal with that problem, even though it was inadequately funded.
Stabex initially conferred a contractual right on ACP countries
to receive compensatory payments for fluctuations in export earnings
of some commodities, very much like insurance payments. Later
on, it has become fraught with conditionalities. Since price fluctuations
in world markets are not the result of domestic policies of any
ACP country, this is illogical. Furthermore, Art. 186 of Lome
IV restricted diversification to `appropriate productive sectors
in principle agricultural, or for the processing of agricultural
products'. In the case of tropical timber (`sawn wood' pursuant
to Art. 187) devoting transfers to the sector concerned reinforces
environmentally harmful effects, which are already quite perceptible
in the case of West African wood exporters. Reducing options of
industrialisation such restrictions were a late vindication of
those critics claiming that Stabex hindered diversification, a
statement not valid initially. A new Stabex system should be introduced
for all developing countries co-operating with the EU. Funds must
again be given as under Lome I, depending as insurance payments
solely on the statistical evolution of export earnings, and without
any conditionality or restrictions in their use, except that investing
these funds in diversification measures should be encouraged.
Self-monitoring groups would check abuse.
Professor Kunibert Raffer
Department of Economics, University of Vienna
Commission (of the EU) (1996) Green Paper
on relations between the European Union and the ACP countries
on the eve of the 21st century, (Draft) Brussels (14 November).
Commission (of the EU) (2000) Communication from
the Commission to the Council and the European ParliamentThe
European Commission's Development Policy, Brussels (26 April)
COM(2000) 212 final.
Raffer, K, & H.W.Singer (1996) The Foreign
Aid Business, Economic Assistance and Development Co-operation,
Elgar, Cheltenham [paperback: 1997].
Streeten, Paul (1994) `A New Framework for Development
Cooperation', in: Benessere, equilibrio e sviluppo, Studi in onore
di Siro Lombardini, a cura di T. Cozzi, P.C. Nicola, L. Pasinetti,
A. Quadrio Curzio, con la collaborazione di G. Marseguerra, vol.
I, Vita e Pensiero, Milano, pp.111ff.