This week in Brussels, the European Union (EU) institutions proudly launched a new ‘Consensus for Development’ that will shape their development policy for the next ten years. The European Union and its member states collectively account for just over half of global aid spending, so their position is important. Even if we just consider the financing provided by the European Commission, European Development Fund and European Investment Bank, the consensus will shape how some 14 billion euros a year is spent for a decade. I travelled to Brussels this week to learn more at the annual European Development Days.
The consensus – three good points
The consensus has many good points. First, it is a relief that it exists at all. There is a wide range of approaches to development across the EU, from Sweden’s ‘feminist development policy’ to the ‘illiberal democracy’ championed by Hungary’s Prime Minister. The UK is preoccupied with Brexit; France and Germany with elections. Given this, credit goes to Commissioner Neven Mimica, the parliament’s development committee and the Maltese Council presidency for brokering a deal in a time of uncertainty.
Second, the consensus recognises a commitment to transparency “which should progressively cover the full range of development resources” (para 115). In its submission to the consensus, Publish What You Fund called on the commission to publish data on trust funds, which sit outside the regular EU budget process, and we are pleased to see that reflected in the final document (para 80).
Third, it recommits the EU to development effectiveness, which has been losing traction. Possibly the commissions professional staff remember the ‘bad old days of development’, when it was treated as an extension of foreign policy, better than the new British or American governments. Or maybe the multi-national nature of the EU makes it easier to resist the populist appeal of “aid in the national interest”. Either way, I hope the EU takes its ‘partnership’ talk seriously, and treats fragile and aid-dependent states with the same respect it already accords major trading partners like Turkey.
Migration as development?
One weak point is that the consensus treats development and migration as substitutes. There is no evidence that development reduces migration, as Michael Clemens and Hannah Postel from the Center for Global Development and others have demonstrated. If anything, investing in development raises migration in the short to medium term, especially by educated young people with poor job prospects. Nevertheless, the EU’s ‘Emergency Trust Fund for Africa’ has the explicit objective of tackling the ‘root causes of migration’. This raises the prospect that aid money will be directed towards security, building walls and fences to keep migrants out of ‘fortress Europe’. That is not an appropriate approach for an institution claiming the moral high ground.
One of the controversial points is blended finance. The EU follows the United Nations and the OECD in appealing to the private sector to help achieve the Sustainable Development Goals. In principle I agree with this: businesses create jobs and many other things that people value. However, rather than creating the conditions for all business to thrive, the emerging approach is to cherry-pick particular projects and sectors and subsidise them. The proposal for a European External Investment Plan was published around the same time as the consensus. It envisages using public money to guarantee or ‘de-risk’ private investments, in the belief that this will unlock or ‘crowd in’ more investment from private sector.
A blended approach
The blended finance approach is similar to the Investment Plan for Europe championed by Jean-Claude Juncker, and has many of the same drawbacks. It assumes that the binding constraint to investment and growth is a shortage of capital. However, with interest rates near zero in the euro area and a flood of Chinese capital going into ‘Belt and Road’ projects, that seems unlikely. Moreover, many leaders in development finance argue that the binding constraint to growth is a shortage of bankable projects (as described by the EBRD President here). A better approach to blending would be to invest public money in the feasibility studies and regulatory reforms that make projects attractive to investors. The EU could use its diplomatic clout to make sure its companies pay a fair rate of tax in the host country, and in return don’t have their assets confiscated.
This approach might not achieve the same leverage ratio as claimed of blended finance, but would create a level playing field for business, and reduces the risk that public money is either wasted on unviable projects, or enhances returns for private investors.
The EU’s development institutions have come a long way since their humble beginnings in the 1960s. Our last Aid Transparency Index ranked the European Commission as ‘good’ and the European Investment Bank as ‘fair’ in their level of transparency. Now its challenge is to assume the global leadership role in development that is being abdicated by the United Kingdom and United States. The EU Commission and big member states like France and Germany have signaled they are willing to do so. I hope their actions match their words.