Blog: Europe’s aid experience shows the value of supporting middle-income countries

EU aid to its member states has proved highly effective – so why pull the plug on countries such as India and South Africa?

This article was originally published by the Guardian

By Jonathan Glennie and Gail Hurley

How long should countries continue to receive international aid? With the majority of developing countries now described as middle income, this debate is dominating discussions about the future of development cooperation.

Despite the variety of opinion, there seems to be growing support for the view that we should focus aid on the poorest countries.

In 2011, the EU development commissioner announced plans to withdraw aid from many middle-income countries. Meanwhile, the trade bloc’s largest donor, the UK, will soon end its programmes in countries including India, South Africa and, most recently, Vietnam, arguing that they are “now in a position to fund [their] own development”.

But one area has been largely overlooked in this discussion: aid the EU provides to member states. Every year, the bloc funnels huge sums of money from richer parts of the continent to poorer ones. The budget allocated to structural and cohesion funds for 2007-13 totalled €348bn (£286bn), about 35% of the EU’s overall budget. That makes it the second-largest budget item after the common agricultural policy.

These funds, intended to “narrow the development disparities among regions and member states”, are spent on areas such as infrastructure development, job creation, research and innovation, and environmental protection. Most assistance is provided in the form of non-repayable grants or direct aid, although loans, interest-rate subsidies, guarantees and equity are also used. Crucially, programmes are co-financed and implemented by recipient countries and are monitored and evaluated jointly with the EU.

A decade ago, 10 post-communist eastern European countries joined the EU. Their gross domestic product (GDP) per capita was a fraction of that of the 15 “old” member states. But with EU accession came access to billions in intra-regional development aid. The results are hard to dispute.

Poland, the largest EU newcomer, has received €67bn in development funds since 2007, about €10bn a year and roughly 3% of its annual GDP. Over that period, the country has experienced a 65% increase in its GDP per capita, breaking the $21,000 (£12,400) mark to become the world’s 49th richest country.

Despite this relative wealth, the EU has set aside a further €60bn in aid money for Poland over the 2014-20 period, with the aim to continue the investment in roads, hospitals, schools and other infrastructure needed to “narrow the development disparity” with other EU countries.

It is not just the bloc’s newcomers that have benefited from EU development aid. Ireland, Portugal and Spain have also been major recipients. In the 1990s, Spain absorbed more than 20% of the EU’s structural and cohesion funds, which helped build the country’s transport infrastructure.

And it not only countries that are targeted – disadvantaged regions can also apply for funds. Even though the UK is one of the EU’s richest countries, and a net contributor, certain regions – particularly Wales and Cornwall, but also parts of northern England and Scotland – are major recipients of aid. The aim of such support is to co-fund investments in job creation and local development.

Clearly, it is EU policy and practice, voted for by member states, that continued aid to countries very high up the income-per-capita scale represents a good use of taxpayers’ money (of the 28 EU members, only Hungary and Romania are considered upper middle income; the rest are high income).

The reason these countries (or regions) have not graduated from aid – despite no longer being desperately poor – is that aid is not focusing only on extreme poverty, but on growth, infrastructure and convergence, with higher living standards in neighbouring countries.

It is, therefore, frustrating to see it argued that both multilateral and bilateral aid money should be reduced – or even axed – in parts of the world that are incomparably poorer and in urgent need of infrastructure development similar to that being supported in Europe. Vietnam’s GDP per capita is just $4,000, and it is home to almost 40 million people living in extreme poverty (less than $2 a day).

Many lessons could be learned from the European experience:

 While the worst effects of extreme poverty are decreasing, that does not mean assistance is no longer needed. Aid can do a lot to support the convergence of living standards around the world.

 Aid at relatively low levels (as a proportion of GDP) can work. In fact, aid may well be even more effective in countries of greater economic advancement, where institutions tend to be more solid.

 Regions can be targeted successfully, not just countries.

 For most countries, the shift from bilateral aid programmes to multilateral partners, while sensible in that it streamlines efforts, means a shift from grants to loans. The EU, however, shows that countries higher on the income scale can also benefit from grants; countries do not have to graduate to loans.

 Contributor countries have benefited from intra-EU aid by having healthier and wealthier neighbours, and because their companies can participate in aid-funded projects. German firms, for instance, helped to deliver Spain’s infrastructure. This does not necessarily mean that aid is tied.

 The EU put recipient countries in the driving seat, recognising that national and local governments are best placed to decide how funds should be used.

The overall experience shows that aid at higher levels of income is not only useful but can be transformational. Rather than reducing assistance to poorer countries elsewhere in the world, the EU and other donors should be continuing and increasing aid, just as they are doing closer to home.

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