Select Committee on International Development Minutes of Evidence

Examination of Witnesses (Questions 229 - 239)




  229. Secretary of State and Mr Smith, thank you very much for coming and talking to us today about the EU budget. As you know, the Committee have been to Brussels and they have been taking evidence from Commissioners, and clearly the Commission is part-way through the reform process. I suppose it is always going to be a question of whether the glass is half full or half empty. One of the things that Chris Patten said yesterday which struck me, he made the point that Poland gets more help from the EU external affairs budgets than the whole of Asia. It was quite clear listening to Chris Patten that he felt what the EU were doing in relation to aspirant states, the European Union and the Balkans, was all sensible stuff in terms of EU foreign policy. It made me think that maybe part of the problem here is that all this money should not come from your budget. We are concerned about it because it takes about one-third of your budget. Maybe all those things in the Mediterranean, the Balkans and Eastern Europe, which are all perfectly virtuous things, ought to come from the Foreign Office's budget or the Treasury's Budget and they should not come from DFID's budget. I was wondering whether you had any thoughts on that; and whether we should be writing to various permanent secretaries and saying, "Hands off DFID's budget"?

  (Clare Short) Yes, but it is slightly more complicated than that, in that countries that do not count as ODA-eligible, that money is not part of Britain's aid budget but the Treasury has to agree which government department will take the draw-down in order to get the money properly handled. It is not logical that it should come on to our budget when they are not ODA-eligible countries—but if the Treasury's judgment was insofar as it is possible to try to ensure money handled through the EC is well handled it is more likely to happen if it drew-down on our budget. In the Comprehensive Spending Review an allowance was made for the likely non-ODA costs of this activity. Indeed we took the risk, on the prediction that the EC would not be able to spend as quickly as they claimed, we might be able to get the money back from ODA, and we did. That could be a dangerous game if one continued. There is an issue for the future of the countries that are candidate countries for the EU, when they continue to get funds for structural adjustments so that they can be fully part of the European market; once they have joined I think the case for the money not drawing down in any way on our budget is overwhelming. I am a bit worried because (crudely, we are better at managing money) if it was argued it should continue to draw down on our budget the spend will get up to speed and it could start endangering the ODA money. I think that is the place to draw the line, if that is clear. It is a red herring on aid. It is about the handling of money to help countries that are going to join the EU that are not ODA-eligible; but Albania is. Albania is so poor that it is.

  230. Do you feel that the way in which DFID has contributed to the EU development budget is fair, so far as you are concerned? Is there any issue you have with the way the mechanics of that work, which you feel works unfairly against DFID? It sounds to me, from what you are saying, you have taken various compensating action where you feel probably the machinery at Whitehall makes it fair; but are you satisfied that it is fair?
  (Clare Short) If I could just step back a bit. We inherited a situation as a country where the amount of our development assistance that went through the EC had grown very considerably as a result of a settlement reached at the Edinburgh Summit under John Major's government. The problem is, as you know, when you get a summit and people are trying to reach agreement, giving more aid money through the Commission was perhaps thrown in to settle the deal, and it shows really the low level of respect for this endeavour that goes on across the international system. We inherited a position where a third of the budget went through the EC. The quality was very poor. There was an inability to spend and it was skewed against poor countries. In the short-term it was unchangeable so we set ourselves to really try and drive the reform agenda. Some people say, "Let's stop the Commission doing any development work because they are so bad at it", to which obviously you have to get all countries to agree, and you could only agree that at a future summit. It is highly desirable if we could get the Commission working more effectively because it could be such a powerful force for good. No one country can be represented and have a development programme in every single country in the world, but the European Commission can; and of course it is the largest single market destination for the exports of developing countries, so it could be more generous to them. If we could drive forward a really coherent committed development agenda throughout the Commission it could be a fantastically powerful force for good; both because we could not cut the amount of money that went through the Commission anyway in the short-term, and because it could be such a force for good; we have worked enormously hard trying to drive forward a commitment to reform. I think the push came out of the UK. People who were pro-European tended to not talk about it because it was so embarrassing and, therefore, Euro-sceptics would climb on the bandwagon as another way of attacking the EC. So it is a bit of a secret how appalling things were in the past. We broke that out into the open, and your predecessor select committee (and some of you served on it) really did strong, committed and important work on this. I am sure on your visits to Brussels and in your meeting with Chris Patten and Poul Nielson (whom I assume you met with) they have said there is a strong reform agenda, it is in place and it is being implemented. That is a great achievement, but, firstly, it is going to take ages to drive through and really affect what happens on the ground; so although we have achieved a lot for the really poor people in the real world it will be a considerable time, many years, before they get to feel any real benefit; secondly, and this we just have not won and have not moved, if you look at the resource that goes from the EC, together the EDF under Lomé now Cotonou and the budget, the money is massively skewed against poor countries. You know the figures. Some years ago it was 70 per cent that went to the least developed countries and it came down to 52. We have just done some work on the new figures and it is down again to 38 per cent. You get this argument within the Commission and around the development argument amongst the Member States as well that the EDF is for the poor, and the budget money is for something else. Of course, by definition, because the ACP countries are Africa, the Caribbean and the Pacific, that spend will go overwhelmingly to poor countries. Unless we can win this argument, that the whole budget must be looked at together, with the same kind of disciplines that we have tried to impose on ourselves—and it is clearer and clearer in the use of ODA that you need to put it where the poor are and behind reform efforts, and that is when it is at its most powerfully effective in lifting large numbers of people out of poverty and speeding up development. We must get the Commission and the Member States to take this argument seriously. The biggest thing of it is the massive under-spend in Asia. In India alone a third of the poor of the world live. It is a country of a billion people and the EC's contribution is very small indeed. Of course, the battle we have just had about Afghanistan and getting a Commission commitment at the Tokyo Conference is very interesting. What tends to happen in the arguments in the EC is that the General Affairs Council, which meets monthly, (the Development Council meets only twice a year, and is overwhelmingly foreign ministers) have a "let's throw some money at the latest problem" mentality to catch a headline; and, "Oh, dear, what shall we do about the Balkans? Throw some money at it. Oh, dear, there's a problem in the Middle East", or, "We're worried about people having refugees from Africa, let's throw some money at the Med". Then you get, "It's not thought through. There are no plans for spending the money properly". It does not promote development or help the poor in middle income countries to throw money at them; in fact it often props them up in not reforming because they have got some extra money to disburse and therefore do not have to face up to the fact that the poor of their country are not properly included in educational opportunities, health care and things that enable them to become part of the economy. I think the glass has moved. There is some water in the glass on the reform effort, but it will take many years to be carried through, and we are not winning the argument on the distribution of the resource, we are going backwards, and that is very serious indeed. It means lots of money is being badly deployed and it is not assisting the poor; in fact, throwing money at middle income countries has an opposite effect, in my view—it holds back the reforms which are need for their economy to prosper and for the poor of those countries to be included in the chances of economic growth.

Mr Battle

  231. Before the question of the distribution of the resources and the way the budget structure works, and you have been clearer than we have heard in lots of evidence sessions so far because there is such a lack of clarity between the EDF/ACP spending Category 4 that there seems to us to not be a clear poverty focus. Do you think, within the Commission, within the European Union, there is an agreement, a clarity about who the poor are? Is there a clear definition? Do they accept the same definitions of perhaps OECD Category 1? You used the phrase ODA eligible. Is there a clarity about who should be eligible for the money in the first place, and could that be agreed upon?
  (Clare Short) There is absolute clarity in the international development system. The Development Committee of the OECD all countries that provide aid report to, and they issue a published report on how that aid is used and what proportion goes to the least developed countries and to low income countries as a category, and so on. There can be no confusion intellectually or conceptually. I think what there is is a lack of commitment to spending the bulk of the resources on development for the poor. There is a constituency that says, "We are concerned about our near abroad, the Balkans, the candidate countries", and they want to say, "Oh, the UK is concerned about the poor of the world, but we're concerned about the fate of the EU and our own near abroad", and that means the Balkans, North Africa, the Mediterranean and so on. I think a lot of people just believe that is a difference of political view, but you need to unpack that. All the evidence on effective development and good use of ODA resources says that is a mistaken view, that throwing money around in middle income countries does not produce good effects for poor people or sustained development; it is a misuse of resources. It is a political argument rather than a confusion I think; or it is a difference in definition of the poor; a development effectiveness argument we have not won. There are a lot of people in the development argument, they have either got it in the charity box in their head—"Oh, dear, all these poor people, we'd better give them a bit of help"—or it is a handout rather than an investment in creating conditions that will enable the economy to grow and for them to get the public services to enable them to improve their lives. That is one argument in the whole international system we are beginning to shift but I think we have not won. This has been a lot of the history of aid, as you will know, especially in the Cold War years. We saw it as a tool of politics. Maputo being the famous example. The West threw money at him; they knew he was a corrupt kleptocrat, but he was a pro-Western kleptocrat, and he carried on until it was just too embarrassing. Obviously, post-Cold War the examples are not as extreme, but there are still a lot of people who see a budget as deeply political; as tying countries in alliances; as helping trade prospects. We would argue, not only is that morally questionable, it is not caring about the poorest of the world who deserve a chance in life, but it is an ineffective use of aid resources. It is the effectiveness of aid argument we need to take further and win more converts.

  232. To go back to the distribution of resources, given there is the development money, the Category 4 money, given you are saying things are getting worse unless money is going to the poorest, what is the one thing in budgets we ought to be pressing for; is it for ring-fencing of a particular vote heading in the budget, or is it to budgetise the EDF? What do you think is the one thing we ought to press for to make the change and reverse the way things are going at the present time?
  (Clare Short) I do not think there is a simple techy answer. This is a political battle about what aid is for and how it is best used effectively, and what is the role of the EC development effort. I do think we should try and get finance ministers more engaged. Crudely, foreign affairs ministers like a big aid budget to throw around and it is politically-led then rather than poverty reduction investment-led—that is across the world. You are not going to win it there, crudely. We are all getting ready for the Financing For Development Conference to be held in Monterrey in March. How can we get the chief millennium development goals in the world? The Zedillo Report suggests we need a doubling of ODA in our system from the 55 billion we have got, to double that. There is a lot of pressure on European Union finance ministers to come up with some goods, and yet a lot of what they are finding already is being so badly spent. You could increase its effectiveness and per dollar spend, and have much effect on reducing poverty, by spending it better. I think we should open that channel. I think Gordon Brown is interested in that. I think we have to take this argument across Europe and win it. It really is the argument about how you deploy resources; and what is aid for; and getting that whole argument to become more grown-up and sophisticated. There are certain NGO links across the EU. I think your Committee previously did try to link up with parliamentary committees in other countries. I think we need more of that. I must win this argument but there is a way to go.

  Mr Battle: We are intending to do that.

Tony Worthington

  233. Can we stick with the PHARE and TACIS funds which is in a sense what we have been talking about. According to the figures we have been given, in 2000-01 in broad terms about 50 per cent of the money that DFID sends to the European Community goes either to the PHARE and TACIS funds or the Mediterranean countries; 41 per cent to Central and Eastern Europe. Would you agree with those figures?
  (Mr Smith) PHARE deals with Pre-Accession countries. I would have to check the figures, but that might be broadly right.
  (Clare Short) I think it is crudely; I could not say the figures are right. Given that things are skewed away from low income countries, the logic is the kind of picture you have drawn.

  234. That something like 30 per cent of the DFID budget goes to the European Union, is that right?
  (Clare Short) Yes.

  235. Of that 30 per cent, something like half goes to MEDA, PHARE and TACIS?
  (Clare Short) It goes to non-low income countries. It is worse. This year it has gone down to only 38 per cent going to low income countries. We have gone from 70, to 52 and now this year worse again.

  236. How is our percentage contribution to those budgets determined?
  (Clare Short) In two different ways, as I understand it. On the Lomé/Cotonou negotiations there is then a deal to replenish. It used to be every few years but, at the end of Cotonou, we slightly changed it. There is a horse trading final settlement when you have got the Lomé Agreement or the Cotonou Agreement and 13 per cent of the total. Then there is another set of horse trading around summits and so on and 18 per cent of the budget.
  (Mr Smith) It is 19. The budget is not so much horse trading as the formula. I imagine there is horse trading about the formula, but the formula is rather mechanical based on GDP, population and customs receipts.

  237. Could you let us have a note on that?[1]

  (Clare Short) On how the 19 per cent is arrived at?

  238. Yes.

  (Clare Short) The EDF is more political. Obviously there is an expectation on countries in relation to the size of their economy and so on; but there is a formula for budget money. One thing I forgot to say in my introductory remarks—there is a nightmare scenario that we push on with the reform agenda; we need to win the argument about distribution; but, in the meantime, the reform agenda works to some extent and the spend speeds up; so even more of our budget will be badly allocated. That is my nightmare, and I think we are going to see some of that. At the moment we get money back because they cannot spend it, I think they are going to get better at spending money badly allocated.

  239. These are enormous sums of money, according to the PHARE website. It is 11 billion euro for the year 2000-2006. In a sense, that has increased because they are also referring to the coming on stream of something called SAPARD in agriculture and ISPA in transport and environment, which has freed up more money for the PHARE activities, because PHARE does not have to spend money on agriculture and transport in the same way. Is that your understanding of it?

  (Mr Smith) In the 1999 Berlin Summit it was agreed to establish a separate category in the budget to deal the applicant countries, and it was proposed on three lines, the ones we have mentioned—PHARE, which used to deal with Eastern Europe in general, including the Balkans and then focussed on the accession countries; plus the new ones ISPA, and SAPARD. Together they have a separate category in the budget, which is the one the Secretary of State referred to, and that was dealt with in the Comprehensive Spending Review.

  (Clare Short) Not all the money in my budget is aid money. That is the original question the Chairman asked me.

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