Select Committee on International Development Appendices to the Minutes of Evidence


Memorandum submitted by Professor Kunibert Raffer, Department of Economics, University of Austria

  With the innovations of Lome I the EEC introduced a new and innovative form of North-South co-operation, establishing strong intellectual leadership in development co-operation. Unfortunately, this unique element of innovations has been pushed back by the following treaties, increasingly making the EU a donor like any other. To regain this intellectual leadership in development co-operation the EU should again be prepared to implement ideas increasing the element of partnership and the relevance of the Rule of Law and of the market mechanism in North-South relations. The present drive to reform development policy would be an excellent starting point. On this basis the following proposals—which strongly draw on Raffer & Singer 1996—to increase the quality of development co-operation substantially are made:


  The Commission (2000, p.14) rightly stresses that the Community's aid system is too complex, and that financial control has to be simplified. It also strongly called for ownership. The best and simplest way to do so would be copying a most successful innovation of the Marshall Plan: self-monitoring by recipients. The US encouraged Europeans to monitor one another's performance. Each Western European government submitted a plan which was inspected, vetted and monitored by other European recipient governments in the OEEC (Organisation for European Economic Co-operation). Control by peers is also a principle advocated in business management. The EU should introduce this form of international co-operation, first recommended by Paul Streeten (1994), treating their partners precisely as they were once treated as recipients. This would solve many EU-problems, such as too high complexity and understaffing. Of course, given the present state of some countries, not all countries could immediately participate. Some would need help to do so, but the success in Europe strongly suggests trying this model in the South as well.

  Self-monitoring and joint requests to the EU should and could be further enhanced by integrating NGOs into the process. Present institutional contacts between the EU and NGOs could serve as a starting point. Public discussions including affected people, open information policies and thus strong transparency should be encouraged. This model would fulfil all demands of good governance, democracy and transparency presently voiced by donors in a democratic and transparent way. To overcome the problems of aid fatigue, lack of `ownership' by recipients but also (sometimes) of mutual distrust, an emulation of this principle of Marshall aid is advocated. Country groups could get together mostly according to geographical but, if this should be more advisable, also according to other, e.g. economic criteria.


  As long as developing economies remain crushed by unsustainable debts any sensible economic activity is severely impeded and all aid efforts are unlikely to succeed. Removing the debt overhang and restoring the economic viability of debtor economies is thus a precondition for the comprehensive approach to development and poverty reduction demanded by the Commission. It is necessary to achieve the Commission's (2000, p.5) goal to `support action that would enable developing countries to fight poverty themselves'. As long as poor countries have to pay more to service their debts than is available for measures against poverty one key element of EU policy, poverty reduction, is likely to remain impossible. The debt overhang impedes private investment as well. It is thus also at odds with the goal of promoting the development of the private sector. Already in 1996 the Commission (1996, p.35) stressed the importance of progress in debt management, speaking of the `bankruptcy of many African states' (ibid., p.5), declaring: `In the light of the enormity of the foreign debt problem facing many ACP countries, it is hard to turn a blind eye to international initiatives in this area.' (ibid., p.57) Unfortunately, the Commission managed.

  Substantial shares of present debts exist only because of prolonged, unsuccessful debt management by official creditors refusing necessary debt relief over years. This increased debt burden is creditor caused damage which poor people in the South have to pay for. The principle of coherence between trade and development policies (Art. 130v of the Maastricht Treaty) demands that the problem of unsustainable debts be resolved. Debtor countries' debt service has to be brought in line with their abilities to pay under present, protectionist conditions, while safeguarding a minimum of human dignity of the poorest and most vulnerable. The fairest and economically most sensible way to do so would be the internationalisation of Chapter 9 of US insolvency laws (cf. Raffer & Singer 1996). It deals with debtors having governmental powers, and protects those affected by the composition plan, giving them a right to be heard. Both the indebted municipality's employees and tax payers expected to pay more have the opportunity to object. Creditors are to receive what can be reasonably expected under the circumstances, and humane living standards of people living in the indebted municipality are protected. It could be applied internationally at once with very minor changes. Thus a neutral court of arbitration—as usual in international law—would have to replace national courts to avoid decisions influenced by national interests of creditor or debtor countries. Each side nominates an equal number of arbitrators, who in turn elect one more member to reach an uneven number. Ideally, the number of arbitrators should not exceed five. The interests of the population affected by the plan could be defended by trade unions, grassroots organisations, religious or non-religious NGOs, or international organisations such as UNICEF. This would finally implement the rule of law in international relations, introduce sound economic principles and protect a minimum of human dignity of the population in indebted countries. As the example of Germany shows, whose debts were halved in present value terms by the London Accord of 1953, de facto insolvency does not harm a country's economic future. It is a precondition for successful development efforts.

  Debtor protection is one of the two essential features of insolvency presently denied to the poorest. In a situation of overindebtedness the right of creditors to interest and repayments collides and the principle recognised generally (not only in the case of loans) by all civilised legal systems that no one must be forced to fulfil contracts if that leads to inhumane distress, endangers one's life or health, or violates human dignity. Briefly put, most debtors cannot be forced to starve themselves or starve their children to be able to pay. Developing countries, by contrast, are forced to do so. The other is the most fundamental principle of the Rule of Law: that one must not be judge in one's own cause, as creditor countries—including EU-members—presently are. Both human rights and the Rule of Law would thus demand a fair and open arbitration process modelled after US Chapter 9 to create the preconditions for development, as also demanded by the Jubilee 2000 movement. An international insolvency procedure for states is also a necessary part of a meaningful international financial architecture.


  Development co-operation has suffered from what is technically referred to as policy incoherence or inconsistency. Subsidised EU beef exports to West Africa undermining EU aid to support local beef production is but the best known example. The Maastricht Treaty demands consistency. Art.15a of Lome IV demanded coherence. The Green Paper repeatedly invoked the importance of this principle (e.g. Commission 1996, p.3;4;14;41;45f). Nevertheless the Commission (1996, p.46) refused expressly and steadfastly any commitment to coherent and consistent policies:

    `consistency ... that is the external effects of policies other than development cooperation, can in any case never become an international commitment on the part of the Community. ... consistency remains a matter of judgement. The Treaty of the European Union answers these concerns by imposing the principle of consistency, particularly with regard to its external activities (Article C of the Treaty) and explicitly with regard to development cooperation (Article 130v).'

  Although it is argued that the Maastricht Treaty must be respected to the digit behind the decimal point in the case of policies politically justified by the common currency, and honouring WTO commitments has often been cited as necessary, the Commission has no intention whatsoever to obey the Maastricht Treaty when it comes to aid (cf. also ibid., p.ix). The Commission's (2000, p.13) recent Communication repeats the view that legal obligations may or may not be obeyed. European taxpayers' money is likely to be wasted for projects whose success will be destroyed by taxpayers' money as in the past.

  If damage is inflicted by incoherent policies countries suffering from these effects must be entitled to full compensation. Offsetting such negative effects must be an obligation, rather than a mere possibility (cf. Commission 2000, p.13: `may be devised'). It is mandatory to make the Commission respect legal obligations vis-a"-vis poor countries as well. The credibility of the EU's advocacy of the Rule of Law as a necessary and useful principle would be extremely strengthened if this principle were applied by the Commission too.


  It is present practice to let recipients pay for failures made by the staff of donors or International Financial Institutions (IFIs), even in cases of gross negligence, where a firm in an OECD-country could successfully sue its consultant for damages. This exemption from economic and legal consequences leads to failed projects or programmes calling for new ones to repair damages, often financed by new loans from the same source. Particularly in the case of IFIs. IFI-flops thus create IFI-jobs. This perverted incentive system creates systemic inefficiencies and failures.

  Because of the predominance of grants in Lome and in the post-Lome Convention this problem is, of course, much less pronounced than e.g. in the case of IFIs. Nevertheless the EU could play the role of the innovator, bringing simple but necessary market mechanisms and the Rule of Law to bear. This could be done by introducing a similar liability for advice given together with money as in the case of private consulting firms that are liable to compensate damages their clients if they acted negligently. Setting a precedent for all donors and IFIs the EU could improve development co-operation dramatically, and might eventually convince others to follow this example.

  This market element would act as an incentive to perform better and protect the poor from damages done by ill-conceived projects. Victims of development projects must be enabled to receive damage compensation. While donors (including the EU) and IFIs keenly preach human rights or respect of private property they have financed projects violating these values (e.g. by forced resettlements without proper compensation). Often, the victims were vulnerable groups or indigenous people. The right of victims to make donors accountable for what they facilitate is needed to improve the lot of the poor, whose human rights and sometimes whose lives are too often not respected by their governments as well as their governments' public financiers. Doing so the EU would play a pioneering role in finally bringing the DAC's important principles of accountability and the Rule of Law into development co-operation, granting the victims of development co-operation the rights any decent legal system confers on all human beings. Real accountability would certainly increase the quality of projects.


  Sharp fluctuations of commodity export revenues expose many developing countries to shocks comparable to if not worse than the effects of the oil crises of the 1970s on OECD countries. Strongly concentrated on commodity exports, the poorest countries are particularly adversely affected. Lome I knew a mechanism to deal with that problem, even though it was inadequately funded. Stabex initially conferred a contractual right on ACP countries to receive compensatory payments for fluctuations in export earnings of some commodities, very much like insurance payments. Later on, it has become fraught with conditionalities. Since price fluctuations in world markets are not the result of domestic policies of any ACP country, this is illogical. Furthermore, Art. 186 of Lome IV restricted diversification to `appropriate productive sectors in principle agricultural, or for the processing of agricultural products'. In the case of tropical timber (`sawn wood' pursuant to Art. 187) devoting transfers to the sector concerned reinforces environmentally harmful effects, which are already quite perceptible in the case of West African wood exporters. Reducing options of industrialisation such restrictions were a late vindication of those critics claiming that Stabex hindered diversification, a statement not valid initially. A new Stabex system should be introduced for all developing countries co-operating with the EU. Funds must again be given as under Lome I, depending as insurance payments solely on the statistical evolution of export earnings, and without any conditionality or restrictions in their use, except that investing these funds in diversification measures should be encouraged. Self-monitoring groups would check abuse.

Professor Kunibert Raffer

Department of Economics, University of Vienna

June 2000


    Commission (of the EU) (1996) Green Paper on relations between the European Union and the ACP countries on the eve of the 21st century, (Draft) Brussels (14 November).

    Commission (of the EU) (2000) Communication from the Commission to the Council and the European Parliament—The European Commission's Development Policy, Brussels (26 April) COM(2000) 212 final.

    Raffer, K, & H.W.Singer (1996) The Foreign Aid Business, Economic Assistance and Development Co-operation, Elgar, Cheltenham [paperback: 1997].

    Streeten, Paul (1994) `A New Framework for Development Cooperation', in: Benessere, equilibrio e sviluppo, Studi in onore di Siro Lombardini, a cura di T. Cozzi, P.C. Nicola, L. Pasinetti, A. Quadrio Curzio, con la collaborazione di G. Marseguerra, vol. I, Vita e Pensiero, Milano, pp.111ff.

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