Journal Issue
Share
Article

The European Community’s development program: An outline of the EEC’s cooperative effort on assistance to the Third World

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1976
Share
  • ShareShare
Show Summary Details

Vittorio Masoni and Joris J. C. Voorhoeve

Since its inception with the Treaty of Rome in 1957, the European Economic Community (EEC) has gradually developed a unique program of regional cooperation with less developed countries. The association of the EEC and member states’ overseas dependencies in 1957 was little more than a concession by France’s European partners to the French vision of Euro-African cooperation. But while EEC relations with the Third World can be said to have begun as an aftermath of the colonial period, the Community has since moved to the forefront in evolving original forms of development cooperation.

“Development cooperation” rather than “aid” is the expression used nowadays by the EEC and by its partners of the developing world. While aid connotes dependence on donor capital and technical assistance, cooperation is a wider notion that includes mutual trade, private investment, and a dialogue on development policies.

This article refers to the joint program administered in Brussels by the Commission of the European Communities—the EEC’s executive body—and not to the bilateral aid of its member states. Development cooperation with independent nations is analyzed; relations with member states’ remaining overseas territories are not discussed.

The EEC aid program has grown rapidly in the last 15 years. Net aid disbursements from 1960 to 1964 were $234 million; over the period 1970–74 they exceeded $1.7 billion (see Table 1). The EEC program is still small in relation to the national efforts of the nine member countries (the Nine), which together account for over 40 per cent of all official development assistance from the industrial market economies. In 1974, EEC aid amounted to 12.3 per cent of the Nine’s combined official development assistance, and to 5.3 per cent of total assistance from the 17 member states of the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD). After the United Nations, the EEC is the second largest source of multi-lateral grants. It provides about one third of all multilateral grant capital and one eighth of total multilateral loans and grants (see Table 2).

Table 1Net official development assistance from the EEC, 1970–74
Net disbursements
In $ millionPer cent

of total
Grants1,489.186.7
Technical67.53.9
assistance
Food aid537.731.3
Other grants883.951.4
Net loans226.813.2
Equity capital2.20.1
Total1,718.1100.0
Source: OECD, Development Assistance Committee.
Source: OECD, Development Assistance Committee.
Table 2EDF/EIB disbursements compared with other multilateral agencies, 1940–74
Net disbursements
In $ millionPer cent

of total
Grants
EEC1,48833.2
United Nations2,99066.8
Subtotal4,478100.0
Loans
IBRD
World Bank4,02242.9
IDA2,26924.2
IFC4014.3
Inter-American
Development Bank1,92120.5
African Development
Bank630.7
Asian Development
Bank4374.7
Caribbean Development
Bank50.1
EEC/EDF650.7
EEC/EIB1872.0
Subtotal9,370100.0
Total: loans and
grants13,848100.0
Of which: EEC1,74012.6
Source: OECD, Report of Development Assistance Committee.
Source: OECD, Report of Development Assistance Committee.

Cooperation with developing nations is a good opportunity for Europeans to develop a common policy. As distinct from its member states, the EEC has no colonial past. Politically still divided and integrated only in the economic sphere, the Nine are a “paper tiger,” and do not endanger any country’s political independence. The EEC’s concern with economics and technology puts it right in the center of what Helmut Schmidt, Chancellor of the Federal Republic of Germany, called “the struggle for the world product.” This is not because the Europeans get a small share of the product—they are among the richest in the world. The Nine command about 40 per cent of world trade. Due to their lack of minerals, high population density, and high per capita gross national product, the Nine together are the largest importer of the Third World’s raw materials. Thus, if there is to be a new world economic order, part of its foundation could well be laid in Brussels by a strong, development-oriented European Economic Community.

The Community’s multifarious relations with the Third World can be grouped into seven categories.

The Lomé Convention

In February 1975, after long and complex negotiations that almost reached deadlock at one point, the Nine signed with 46 African, Caribbean, and Pacific states (the so-called ACPs) what is known, after the site of its signing, as the Lomé Convention. For the first time, a large and heterogeneous group of developing nations had bargained cohesively and successfully with a group of wealthy states to regulate their mutual economic relations for five years, until March 1, 1980. That this agreement was reached at the depth of the world’s recession, when the forces of a North-South confrontation were gaining strength, greatly encouraged the proponents of a dialogue between rich and poor nations.

Source: EEC

Under the Lomé Convention most African states south of the Sahara, much of the Caribbean archipelago, and three island groups of the Pacific gained free access for 99.2 per cent of their exports to the European Community (0.8 per cent, consisting of sensitive agricultural products, such as beef and cereals, does not receive free, but only preferential access). This free access does not extend to EEC exports to ACPs. Flexible rules of origin apply to this one-way free trade with all ACP nations being regarded as one territory. In addition, the Community undertook to purchase annually 1.3 million tons of sugar from the ACPs for at least five years at guaranteed minimum prices, indexed to the price which the Community pays its farmers for beet sugar. This provision was designed to compensate Commonwealth sugar producers for the loss of preferential access to the United Kingdom after that country entered the Community.

All the Lomé partners gave publicity to STABEX, a fund established in an innovative provision of the Convention to stabilize earnings on agricultural raw materials and iron ore exports to the EEC. If a developing country’s export earnings on these products fall significantly below the average of the four preceeding years, the shortfall is met by a loan or a grant from STABEX. Although STABEX captured headlines, its financial significance is not very great—over the five-year Lomé Convention period, STABEX commands only 375 million units of account (u.a.), or about $470 million. These funds, moreover, are not additional to the project financing available from the EEC, and thus absorb resources which could have been earmarked for productive investments. Also, the compensation formula is hypersensitive to inflation. Still, STABEX is a useful addition to the International Monetary Fund’s compensatory financing facility, particularly because the advances to any of the 34 least-developed or otherwise disadvantaged ACP states will just be in grant form. As now conceived, STABEX is somewhat of an experiment, which could be improved in 1980.

With the conclusion of the Lomé agreement, the Nine replenished the European Development Fund (EDF) to a level of u.a. 3,000 million (about $3,700 million). The EDF (often called FED according to its French title), will remain financed by the Nine only, since an offer to contribute petrodollars by Nigeria (not a member of the EEC) was declined. Development finance of the organization consists of grants amounting to u.a. 2,100 million, soft loans of u.a. 430 million, risk-bearing capital of u.a. 95 million, and a STABEX contribution of u.a. 375 million. In addition to these funds, ACP nations will be able to apply for commercial loans amounting to u.a. 390 million from the European Investment Bank (EIB), with interest rates subsidized by the EDF.

To encourage industrialization, a chapter on industrial cooperation was included in the Lomé Convention. A special committee and a Center for Industrial Development will seek to promote joint ventures, exchange appropriate technology, and encourage research and marketing of ACP manufactures. Industrial projects and programs are to be financed by the EDF and the EIB. However, the actual implementation of this brief and undetailed part of the Convention greatly depends on the interest of private industrial firms. The fact that industrialization was dealt with by the Convention at all was seen as a diplomatic success for the ACPs, which had insisted on the inclusion of this subject.

Mediterranean policy

Once Europe’s mare nostrum, the Mediterranean is now an international sea-lane, sailed by the ships of distant powers. Yet the coastal states seem attracted to the Community’s vision of a Mediterranean commonwealth of developed and developing neighbors. The EEC policy of rayonnement, weaving a web of close economic ties over the basin, has evolved only gradually and is still in its infancy. In 1961, Greece was the first Mediterranean nation to become associated with the EEC. Turkey followed suit with an arrangement for trade liberalization and development assistance. In 1975, Greece requested full membership from Brussels. The evolving political situation on the Iberian peninsula may also lead to closer EEC ties with Madrid and Lisbon. Full membership for Spain already has considerable support within the Nine. But here excessive ambition may be fatal. Complete membership for additional countries would indeed reinforce Europe’s geographical presence in the Mediterranean, but the rather different economic and political traditions of such new members weaken Europe’s political presence. Bringing those who only yesterday ranked among developing nations under the EEC’s rules, which were designed for highly developed if not overdeveloped, economies would require far-reaching revisions in internal policies.

The EDF and the EIB

The EEC does not administer the European Development Fund (EDF) like a multilateral institution. Legally the recipients have little leverage: they do not participate in any voting, and financing proposals are taken jointly by the donor states only. In practice, however, the EDF has a much more political orientation than a pure bank would have, and consults extensively with the ACP states. It is mainly up to the recipients to make their priorities known to the Commission of the European Communities so that the finance can be allocated accordingly. During the Lomé negotiations, the EEC even proposed that the ACPs decide among themselves how to use the funds. The prospective recipients declined this offer, probably to avoid endangering their fragile unity by an internal fight, and, instead, a new form of aid programming was designed. Soon after the Convention was signed, EEC programming missions flew out to tabulate and discuss the wishes of the ACPs. All recipients have the right to know what their share of the funds will be.

If a request for finance appears to fit into the developing nation’s economic planning, and if it is financially and technically sound, the Brussels staff submits it to the EDF Committee, consisting of donor representatives. If the EDF Committee does not approve the project, the Commission of the European Communities may drop the proposal, re-submit it after amendment, or appeal to the Communities’ highest body, the Council of Ministers. The developing nation has the right to a hearing by the EDF Committee, to present its case if approval is withheld. Decisions are taken by a qualified majority. Few projects have been rejected—of 743 financing proposals since 1964, 734 were approved (92 per cent unanimously). Of the remaining nine cases, six moved upward and received the approval of the Council of Ministers. Only three (0.4 per cent) were abandoned by the staff because no approval seemed possible.

As distinct from the EDF, the European Investment Bank (EIB) has most of its business in the economically depressed regions of the EEC itself, but it gets increasingly drawn into development lending outside the Nine. It may commit about half a billion dollars in commercial loans to ACP nations in the period 1976–80. In addition, EIB’s involvement in the Mediterranean may grow with the development of the EEC’s Mediterranean policy. In 1976, the bank will lend large sums for the rehabilitation of Portugal’s economy.

The EIB is rather independent from Brussels; the word “bank” itself indicates a more financial and industrial orientation than the European Development Fund. The latter provides a 3 per cent interest rate subsidy on the bank’s loans to ACP nations—on the condition, of course, that the investments conform to the objectives of the Lomé Convention.

Recently, new cooperation agreements have been concluded with Tunisia, Morocco, and Algeria. Under these, the EEC has opened its frontiers to the industrial and many of the agricultural products from the Maghreb countries. The Community has also undertaken to provide a total of u.a. 339 million in development grants and credits, as well as technical aid. The inclusion of Algeria, an outspoken advocate of Third World views, is particularly significant. The arrangement which the Maghreb obtained is comparable to the Lomé Convention, even though the three countries are on the whole more advanced than the ACP countries. Unimpeded trade with the Nine would greatly facilitate a rapid industrialization of oil-rich Algeria and of Tunisia and Morocco as well.

The Maghreb agreements are among the first fruits of the EEC’s Mediterranean “overall approach” since its official adoption in 1972. In the course of 1976, the EEC hopes to lay a second cornerstone at the other side of the basin: negotiations have started with Egypt, Jordan, Lebanon, and the Syrian Arab Republic for new cooperation agreements.

The Euro-Arab dialogue

Since the October Arab-Israeli war of 1973, the Community has become more attentive to the views of Arab countries. Vital interests in a peaceful evolution of the Mediterranean basin and, of course, in reliable oil supplies have motivated the Governments of the Nine to improve their relations also with the more distant members of the Organization of Petroleum Exporting Countries (OPEC). So far, little substantive progress has been made in this complicated “Euro-Arab dialogue.” The EEC has tried to keep it in the sphere of “low politics,” comprising technical and economic cooperation for industrial development of the Arab countries and “triangular” recycling of petrodollars (the combination of finance from OPEC states with capital goods and expertise from the industrialized countries for development projects in a third group of countries). But the Arab countries project the consultations on the level of “high politics,” centered around the Arab-Israeli conflict. In spite of these different interests, possibilities for cooperation on specific projects do exist.

Other developing countries

The EEC’s development policy is often criticized for overemphasis on Africa and neglect of Latin America and Asia. The weakness of relations with the latter areas is indeed surprising since European trade with Latin America and Asia is much larger than that with the ACP states.

In 1970, Latin American countries made their concern clear in the Declaration of Buenos Aires, in which the Community was asked to provide more development cooperation. Since then, some progress has been made. Nonpreferential trade agreements have been concluded with Argentina, Brazil, Uruguay, and Mexico. Representatives of Latin America and of the Community meet twice yearly to discuss further improvement of their relations. The EEC makes available a small amount of technical assistance to the Central American Common Market and to the Latin American Free Trade Association.

Table 3EDF disbursements by sector, January 1, 1959-December 31, 1974
Net disbursements
In u.a.

thousand*
Per cent

of total
Transport and communication675,06136.9
Rural production548,87530.0
Education222,39712.1
Housing, urban development, urban and rural water supplies113,0466.2
Industrialization94,3355.2
Health88,6854.8
Emergency aid30,0691.6
Tourism development2,0070.1
Trade promotion1,0690.1
Other55,6973.0
Total1,831,214100.0
Source: EEC.

The European unit of account (u.a.) is US$1.00 up to 1971, $1.09 in 1972, $1.19 in 1973, and $1.25 in 1974 for the EDF and the EIB. The u.a. applicable under the Lomé Convention is calculated daily for a basket of EEC currencies.

Source: EEC.

The European unit of account (u.a.) is US$1.00 up to 1971, $1.09 in 1972, $1.19 in 1973, and $1.25 in 1974 for the EDF and the EIB. The u.a. applicable under the Lomé Convention is calculated daily for a basket of EEC currencies.

The EEC also has nonpreferential trade agreements with India, Sri Lanka, and Pakistan. A similar agreement with Bangladesh has been negotiated. The EEC is also trying to forge closer links with the Association of South East Asian Nations. The People’s Republic of China has accredited an Ambassador to the European Communities, but the relations between Brussels and Peking do not extend to development cooperation.

Food aid

Food aid is a major component of the EEC’s Third World program, amounting to 31 per cent of total Community aid in 1970–74. Food aid is provided entirely as a grant and consists mainly of cereals donated under the Food Aid Convention of 1967. Food provided outside the Convention consists mostly of dairy products. Most food aid goes to non-ACP states, but its geographical distribution varies from year to year.

EEC food aid has been severely criticized for being too closely related to the needs of Europe’s agriculture, as if it were only a means to dispose of surpluses. To meet this objection, the Commission of the European Communities has proposed to program food aid on a multiyear basis, to tailor it to the needs of the developing countries, and to relate its size to the targets set by the World Food Conference. Rationalizing the Community’s food aid policy will not be easy, as it is linked to the thorny question of reforming the EEC’s common agricultural policy.

Common commercial policy

An essential link between Europe and the developing world is the Community’s trade. The common EEC customs tariff was set in the Dillon and Kennedy Rounds of the multilateral trade negotiations, but those negotiations achieved little for the benefit of developing nations. Currently, trade liberalization is being discussed again in the Tokyo Round of the negotiations, in which the EEC has proposed a substantial liberalization for tropical products. Across-the-board tariff cuts, though beneficial for the expansion of trade in general, naturally reduce the value of preferences which the ACP nations enjoy under the Lomé Convention. As ACP states want to safeguard these preferences, other developing countries charge that the Lomé relationship is a threat to the solidarity of the Third World.

The Community was the first, in 1971, to implement the generalized system of tariff preferences (GSP) proposed by the United Nations Conference on Trade and Development (UNCTAD). Under this system, developing countries’ exports of semimanufactured and manufactured goods, as well as some processed agricultural products, can be imported duty free into the EEC. Each year this system has been somewhat improved, although the high hopes of some of its advocates have not been fulfilled. Quota limitations and various exclusions have affected exactly those products in which the developing countries have a comparative advantage. A lack of information and procedural complexities have prevented many developing countries from fully utilizing the possibilities offered by the GSP; only half of the granted preferences have been actually taken up. For these reasons, the GSP covers only about 5 per cent of the Community’s total imports.

The Community intends to continue the GSP after 1980. As it is mainly the middle-and higher-income countries among the Third World nations which can in fact profit from it, the European Parliament of the European Community has proposed that more generous preferences be designed for the exclusive benefit of the poorest nations.

Multilateral aid

In 1974, the Community undertook its first large-scale multilateral aid commitment, pledging $500 million to those developing nations most seriously affected (MSAs) by the economic upheavals of 1973–74. By the end of 1975, a total of $722.5 million had been committed, partly through the EEC, partly bilaterally, and partly through the United Nations. Some EEC Governments saw this as a precedent for further multilateral action and pleaded also for a common contribution to the International Fund for Agricultural Development (IFAD). Others regard the emergency aid to the MSAs as an exception and favor bilateral action in general. The debate between the “multilateralists” and the “EEC bilateralists” has not been settled; there was no agreement on joint support for IFAD. The split coincides to some extent with the discussion between the “globalists” who favor gradual extension of Lomé-type arrangements over all the Third World and the “regionalists” who prefer to concentrate on Africa.

The EEC’s present Third World policy is a texture of many strands of uneven strength and conflicting designs. Historical relations between EEC member countries and former colonies are the warp, while the woof of new relationships with other countries is being woven in only slowly. Two tasks stand out clearly: an extension of this texture over hitherto neglected developing nations (the non-ACPs) and a strengthening of relationships through harmonization of the Nine’s bilateral programs.

In 1975, the Commission of the European Communities proposed a medium-term development program for non-ACP developing countries. Aid would be concentrated on food-deficit nations, principally for agriculture but also for promoting regional integration, the EEC’s special vocation, with the poorest nations of Asia receiving the most aid. The Commission stressed that direct action, bilateral aid from the Community, would be the best way to ensure that aid retained its identity, that it would be distributed according “to criteria chosen by the EEC and the countries concerned, and that it would be optimally combined with other forms of cooperation with the Nine individually and the Community as a whole. As the first step, it was proposed to disburse u.a. 100 million in 1976. Disbursements would then increase annually to reach at least u.a. 200 million by 1980, consisting mostly of grants and soft loans. But the Council of Ministers of the EEC has not yet been able to agree on these proposals. Only a small sum has been approved for 1976. The battle between globalists and regionalists may not be decided for several years.

Harmonization

In 1974, the member states of the EEC decided to give greater coherence to their joint and individual development policies through harmonization. The Federal Republic of Germany, especially, attaches much importance to this. Harmonization would reduce the confusing number of entities the developing countries have to deal with and might increase the volume of aid (if the joint program is not set at the lowest common denominator). Harmonization might improve the quality of aid by pooling technical assistance and untying bilateral aid, that is, allowing the recipients to spend aid funds in any of the EEC states. A more energetic aid effort by the Community would perhaps also stimulate other major donors. But harmonization of member states’ national policies will not be easy. The Nine’s aid programs differ widely in objectives, volume, and instruments.

An important aspect of harmonization is working out a common EEC position in the international forums, such as the ongoing North-South Conference and the UNCTAD. Initiatives have much more weight if presented by the Community as a homogeneous package of multilateral and bilateral aid programs, rather than by each of the Nine and the EEC individually.

Strengthening Europe’s development policy will require a Community-wide effort to increase public awareness of world poverty. The experience of some of the active small donor countries in Europe indicates that a sizable development budget can only be achieved after several years of systematic public information and action by domestic aid pressure groups. Up to now, with the exception of publicity for the Lomé Convention, no significant public opinion campaign has been organized.

Recently, public support for development cooperation has weakened, in Europe and world-wide. Will the EEC rest on the laurels of the Lomé Convention, adding perhaps some symbolic action in favor of the non-ACP countries? Or will this conglomerate of sovereign states unify its vision and muster the resolve to work out a new world economic order with developing nations and other advanced states? One important step Western Europe can take toward eventual political integration is to face this responsibility fully.

Other Resources Citing This Publication