EC’s report on EU development finance

Eurodad has summarized and analysed the main elements on four issues of aid effectiveness, debt, reform of international financial institutions, and or quality commitments on aid based on the European Commission annual development finance Communication: “Supporting Developing Countries in Coping with the Crisis”.

The EC’s annual Communication, based on questionnaires sent to Member States, is a useful, if limited, accountability exercise. It shows that much more needs to be done to implement existing European commitments on development finance, and to go further now that the financial and economic crisis is severely affecting developing countries and may push a further 100 million people into poverty in 2009.

1. Aid Effectiveness
The overall conclusions of the Commission report are that Member States are not fulfilling either their quantity or quality commitments on aid. As well as continuing to insist on timetables for aid increases, the Commission worryingly hints that the OECD Development Assistance Committee should “continue to reflect” on whether the ODA definition should be extended to peace and security related activities in development countries and refers to a “Whole of the Union” approach where contributions to development comprise also private sector guarantees and technology transfers.

On implementation of aid effectiveness reforms EC’s comment is that “progress has been made, but too little and too slow” and has picked four areas of the complex aid effectiveness agenda to demonstrate this: division of labour, use of country systems, mutual accountability for results (including less conditionality) and predictability. Interestingly the EC calculates that the costs of non-implementation of the Accra Agenda for Action would amount to €5-7 billion per year, some ten per cent of EU aid. The Eurodad briefing assesses the EC’s assessment and proposals on conditionality and other issues.

2. Debt
The Debt issue is not high on the EC’s agenda this year – the Communication dedicates just three pages to the issue, despite the very difficult external position for many developing countries. The EC recognizes that due to the financial and economic crisis “developing countries will face a financing gap of $270 to $700 billion this year”, yet does not recommend sufficient counter-measures. Member States’ preference is to enhance existing debt management mechanisms; only a minority of Member States acknowledges the need for a new sovereign debt restructuring mechanism. This shows little commitment to implement the Doha Declaration on Financing for Development. The Commission, however, insists that it and the Member States “should promote a discussion on enhanced sovereign debt restructuring mechanisms”.

3. International Financial Institutions
The Financing for Development Paper is in favour of “the current international debate to review the international financial and monetary architecture and global economic governance”. It also welcomes existing initiatives of World Bank and the IMF reform, as well as the shy measures agreed by the G20 leaders in London on 2nd April 2009. Unfortunately the Communication restates the existing and timorous measures which European Member States and the Commission have publicly stated in recent years but not implemented (mainly due to lack of political will). Only one suggestion goes beyond the insufficient global agreements: to realign “shareholdings in the Bank, considering the evolving weight of all members in the world economy”.

The Communication only briefly mentions the need to improve the IFIs’ lending instruments but not the need to reform IFI conditionality policies and fails to analyse how these institutions pressed developing countries to implement the finance and trade liberalization policies which the EC recognizes have exacerbated their vulnerability to global financial crises.

Europe’s own IFI, the European Investment Bank (EIB), is gaining prominence according to the Communication. The EIB is supposed to become a major tool to “frontload” financial transfers to developing countries at this time of crisis. It shall, for example, increase its lending on infrastructure and energy projects, support multilateral initiatives on trade finance and work together with the Commission to provide investment guarantees. This may be a problem as the EIB has few development guidelines or lending criteria.

4. Taxation and capital flight
Taxes are covered very extensively in this year’s EC’s Financing for Development paper. The Communication reviews how the EC and EU Member States support developing countries in raising domestic resources for development and also points out to the French-German initiative on uncooperative jurisdictions in tax matters. Useful information on the current state of EU Member States’ ratification and implementation of global agreements can be found in the Chapter on supporting an enabling international environment.

The chapter on tax instead, omits to address the role of tax havens in the EU (and overseas territories of Member States), as enabling factors for tax evasion and capital flight from poor countries, nor it addresses Europe’s contribution to the race to the bottom in corporate tax rates, and also omits to reflect on the role which financial deregulation and liberalisation played to allow for tax evasion, imposed on developing countries by IFIs in which Europe is playing a dominant role.

Links to the relevant official documents are contained in the Eurodad briefing.
Eurodad briefing on the European Commission’s April 2009 development finance communication : 120 Kb

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