GREEN PAPER

on relations between the European Union and the ACP countries
on the eve of the 21st century
Challenges and options for a new partnership

CHAPTER II.
THE EXPERIENCE OF ACP-EU COOPERATION

This report should be cited as: European Commission. 1996. Green Paper on relations between the European Union and the ACP countries on the eve of the 21st century - Challenges and options for a new partnership. Brussels: European Commission
DG VIII page

• A. Relations between the Union and the ACP countries: their origins and subsequent development
• B. Successes and failures of cooperation under the Lomé Convention
• C. Implications for future partnership

A. Relations between the Union and the ACP countries: their origins and subsequent development

1. The evolution in Europe's political relationship with the developing world

Community development aid policy has its roots in the association of the overseas countries and territories in 1957, the result of a compromise between Member States advocating a global approach to development and those arguing for a special relationship with Africa.

Association was designed as a broad strategy encompassing both trade arrangements and development aid.

The fact that many countries gained their independence after the first five years of the association arrangements laid down in the Treaty did not bring any fundamental change in the thinking behind cooperation. The Member States, moved by solidarity and a wish to assume their responsibilities as much as by a concern to defend their economic and geopolitical interests in the age of the Cold War, and the newly independent countries, which wanted to go on receiving trade preferences and funding for development projects, decided to continue their cooperation in the framework of the two successive Yaoundé Conventions (1963-69 and 1969-74), which were a natural follow-up to association. During the 1957-74 period of Euro-African relations, the lion's share of Community aid went to the French-speaking countries of sub-Saharan Africa.

In the mid-1970s the international situation, the desire of several Member States to develop a global aid policy and the accession of the United Kingdom combined to bring about a radical shift in Community aid policy. European anxiety at the first oil crisis, i.e. a fear of raw material shortages and a desire to hold on to valued overseas markets, united with geostrategic interests and a residual sense of responsibility for the colonial past to produce the first partnership agreement between the Community and the ACP countries.

Signed in 1975, the first Lomé Convention was open to the African members of the Commonwealth, some Caribbean and Pacific countries, and other countries of subSaharan Africa wishing to take part in these first group-to-group negotiations. There were 46 ACP countries in all.

Meanwhile, Europe was embarking on cooperation with other regions of the world. The latter half of the 1970s saw the conclusion of the first agreements on trade, financial and technical cooperation with Mediterranean non-member countries along with the emergence of a policy on aid to the developing countries of Asia and Latin America, a policy that has been developing steadily and becoming increasingly structured ever since.

The growing importance of food aid, most of it for countries outside sub-Saharan Africa, has been a further reflection of the globalization of Community aid policy since the 1970s.

2. Successive changes within a framework unaltered since 1975

The first Lomé Convention was at the time a unique example of international cooperation. The principle of partnership has been at the very heart of the Conventions that have bound the Community and the ACP countries since 1975. It reflects an approach to cooperation based on reciprocal commitments in pursuit of shared objectives. Principles such as collective negotiations (between the two groups of countries and covering several aspects of cooperation), the dialogue with individual ACP countries made possible by the joint institutions and the contractual and predictable nature of the funding provided have become the foundation of European aid policy under the Lomé Conventions.

Successive Conventions have enabled the partners to adapt aid objectives and instruments without ever questioning the overall framework or the strategy pursued. These adjustments have nevertheless provided an opportunity to draw practical lessons from the successes and failures of the past, and to incorporate, at least partly, the intervening changes in development thinking. Aid policy under Lomé has evolved to reflect:

• the changing perception of the state's role: Once considered the only force able to raise the capital necessary for economic development, its role is now seen as being to establish and maintain a legal and administrative framework guaranteeing fundamental rights and freedoms, to provide essential social services and to foster the development of private enterprise. The nature of the Convention has not, however, changed: the state remains practically the only partner in the aid context, apart, since 1976, the cofinancing with NGOs and a limited number of decentralized cooperation schemes under Lomé IV.
• the shift away from an approach to industrialization based on import substitution to one geared to export-led growth.

Since the Pisani Memorandum, there has been an increasing emphasis on policy dialogue, with a shift from aid focused mainly on project financing to technical and financial assistance for sectoral policies.

The innovations that have given the Lomé Convention its pioneering character include the system for offsetting losses of export earnings introduced in the 1970s and, more recently, 1990's negotiated approach to structural adjustment. Regardless of their future relevance, both instruments were applications of the latest in development thinking at the time. With the end of the conflict between East and West, the Convention was also one of the first cooperation agreements to acquire an explicitly political dimension in the shape of the human rights clause, which, since 1995, has been extended to encompass the application of democratic principles, the rule of law and good governance.

The alterations made to conditionality in the revised fourth Lomé Convention and the principle of two-tranche programming, which limits the automatic nature of programmable aid allocations, also reflect a major change in the Community's approach to aid policy.

3. The need to review the overall framework

As the 21st century nears, the Union must redesign its aid policy towards the ACP countries from scratch, not only as a result of changes in the economic and political conditions governing development or rapid development in other regions of the world but because Europe's motives are no longer the same. The colonial and post-colonial age is over, and a more open international political climate means that the partners' respective responsibilities can be defined less ambiguously. It is in this context that a critical examination of past cooperation can offer constructive guidance for future policy.

B. Successes and failures of cooperation under the Lomé Convention

1. Patchy results

While aid is a major source of income for many ACP countries, it is difficult to determine its impact and effectiveness in terms of improvements to a country's economic and social conditions. Trends in these conditions are the result of a wide range of exogenous and endogenous factors, chief among them being the country's own economic and social policies, which aid can influence but not ultimately supplant.

Some studies suggest that the aid allocated by the donor community to ACP countries has probably had a beneficial but limited effect on growth, investment and the improvement of health indicators, and that this effect has varied appreciably from country to country according to the initial situation and economic policy conditions. Aid has been markedly more effective in those countries that started out with the least capital and human resources, and in countries that have embarked on stabilization policies and structural adjustment programmes.

Community aid accounts for a major share of all the aid received by the ACP countries since the 1960s. The Community is today one of the ACP countries' three main sources of aid, and offers these countries the most generous system of trade preferences. The Lomé Convention has undoubtedly been a unique framework for cooperation between two groups of countries. Its main advantages lie in the fact that it has been a testbed for development aid, that it has provided a negotiated framework for the drafting of a corpus of shared principles and objectives, and that it has mobilized considerable - and almost entirely concessional - funding, without which many practical schemes could not have been carried out. The predictable nature of European aid - part of a long-term partnership - encouraged the governments of the recipient countries to embark on long-term transformations.

Twenty years' experience, however, shows the Convention to be an ambitious but sometimes unrealistic framework based on assumptions about the ACP countries' institutional and political capacities that have not been fulfilled. Thus, the respect for national sovereignty that once took the form of an almost boundless trust in the recipient governments is evolving into an approach guided by considerations of efficiency. The automatic granting of a great proportion of financial resources has undermined the political dimension of Community aid: it has not been conducive to frank discussion of the way in which resources are used. Conditionality in its present form and the policy of substitution that all donors tend to pursue appear difficult to reconcile with the real political commitment expected of the ACP governments, a commitment which would enable them to assimilate reforms and sectoral strategies and assume political responsibility for them in the face of growing public demands for transparency and participation.

Any assessment of the experience of Community aid must hinge on a number of key questions concerning the main difficulties encountered by the principle of partnership, the effectiveness of financial and technical cooperation and the countries that have benefited most, and the impact of trade preferences.

The answers to these questions are neither obvious nor unequivocal. They combine political and economic aspects with the practical administration of aid.

2. The partnership experience

The principle of partnership enshrined in the Lomé Convention has diminished in substance and has not been fully realized. It has tended to be restricted to the institutional side of cooperation and the joint administration of aid resources.

At political level, the relationship between the two partners has been increasingly dominated by the dependence on aid, the needs of the moment and crisis management.

Economic and sectoral policy dialogue has proved difficult with partner countries that have weak institutions and in many cases inefficient administrations. The practice of conditionality has diminished the responsibility of the recipient governments, since the conditions imposed (linked to the criteria applied by the IMF/World Bank) have sometimes been too specific, too numerous or too rigid. In its eagerness to improve the efficiency of aid operations, the Community has tended to take the place of its weaker partner, adopting a more interventionist role that is hard to reconcile with the recognized need to encourage the recipient countries to take charge of their own development process. In an age of increasing political and economic liberalization, non-governmental organizations, representatives of the private sector and other segments of civil society have, for their part, expressed growing interest in direct participation in a partnership from which, with the exception of the NGOs, they have felt excluded.

In the practical management of aid, the structure of instruments and the procedures for the joint administration of resources have not always had the flexibility required to make sure that aid operations accurately reflect political priorities.

3. The evaluation of aid policies

Since 1990, in the wake of the measures adopted by the Council on the evaluation of the Union's aid instruments and programmes, a series of studies have been launched concerning projects, sectors, recipient countries or specific instruments. These evaluations cover the whole of Community aid policy, not just cooperation with the ACP countries. They have served to identify practical measures to improve the efficiency and effectiveness of Community aid and to remedy a number of weaknesses.

The overall evaluation of the European Union's development aid policies and instruments launched by the Council in June 1995 is still under way. A number of points can, however, be made on the basis of the sectoral or geographical studies available.

When considering the conclusions of evaluations, a distinction should be drawn between improvements and adjustments that can be made within the present framework and those that call into question the framework or its underlying principles, reflecting the Lomé Convention's shortcomings as an aid instrument. Only the latter are of relevance to this Green Paper.

One conclusion that emerges from most of the evaluations is that the institutional and economic policy situation in the recipient countries has often been a major constraint, reducing the impact of aid operations. Even though a great number of projects financed by the Union have proved apposite and effective, which is the case of the majority of infrastructure projects and social schemes, they have not automatically led to improvements in the country's development indicators. Without incentive policies, dynamic sectoral institutions and sufficient funding to cover operating and maintenance costs, the viability of the results of aid remains precarious. This fact, which concerns all the donors, is reflected by a tendency for international aid to focus on the countries that seem best able to use it effectively, which at the moment are those undergoing structural adjustment.

The geographical breakdown of Community aid, like that of the other donors, reflects this concern about the way resources are used: resources are directed away from countries in which political conditions fall short of basic requirements and towards countries undergoing structural adjustment. At the same time a criterion based on an assessment of relative need is applied when allocating programmable resources: over and above the general priority accorded to the least-developed countries, priority is accorded to the poorest countries (according to indicators such as per capita income, life expectancy and literacy rates), to island or landlocked countries But the overall country breakdown of Community aid only partly mirrors these priorities. The methods used to calculate payments under instruments such as Stabex and Sysmin, which have their own specific allocation criteria, distort the overall targeting of aid.

Another factor to be borne in mind is that lack of pertinence and inefficiency are sometimes a product of disagreement about the political priorities. The ACP countries have often proved unable to establish consistent sectoral policies, and the Community has tended to rely excessively on technical assistance consultants to determine the procedures for the implementation of its aid operations. Moreover, in certain fields, e.g. the environment, the ACP countries and the Member States may have very different concerns and priorities. Policies in other sectors have often been drawn up according to approaches laid down by the donors, and in particular the World Bank. In yet others, however, among them health, which has attracted a growing proportion of Community aid under successive Conventions, the Community has exercised increasing leadership: through institutional and technical support, the Community has emphasized the development of national health systems, with an emphasis on primary healthcare and access to essential drugs.

The Union has also demonstrated that it can carry through major changes in direction, as in the case of the recently adopted food aid reforms. These reforms, which are a response both to growing problems of food security in sub-Saharan Africa and to the relative inefficiency and adverse side-effects of the instrument used, mark a shift away from a culture of assistance to one of development by supporting food security policies in a number of priority countries.

For certain new objectives, e.g. the development of the private sector, which has acquired increasing importance under the fourth Lomé Convention, Community aid is still not as strategic as it should be, relying as it does on a body of instruments and operations that lack the requisite consistency and complementarity. Projects fostering investment and competitiveness through targeted support to firms remain few and far between, and those there are need to mesh better with schemes to improve the institutional and economic policy environment. In some fields, such as support for regional cooperation and the development of regional trade or for programmes to promote exchanges between firms, the Community's backing is proving particularly apposite and effective.

4. The evaluation of financial and technical aid instruments

The efficiency and impact of Community aid are often undermined by the difficulties of maintaining consistency between instruments which, even if they interact in closely related areas, are governed by different criteria. Some recent Community measures born of the results of the evaluations have, however, been designed to limit such drawbacks. The reform of the food aid system, for example, should generate synergies with EDF operations by placing a policy of food security in the wider context of efforts to alleviate poverty.

(a) Project aid

The impact and efficiency of project aid, which now accounts for an appreciably smaller share of overall funding, vary considerably from one sector to another. An evaluation of 335 projects started in the 1980s, for example, puts the efficiency rate of transport projects at 70%, compared with only 30% for agriculture and rural development projects. A number of inherent weaknesses in the instrument have, however, been identified:

• Project aid tends to underestimate the importance of the macroeconomic framework in ensuring a satisfactory impact in terms of improved living conditions and a project's long-term viability.
• It is inappropriate - and therefore ineffective - where there is no clear sectoral policy. Indeed action of this kind can sometimes delay the reforms necessary by masking the underlying constraints.
• A widespread failure of governments and/or beneficiaries to internalize over development projects also reduces their effectiveness, especially where accompanying measures prove inadequate.
• As with any other form of intervention, inadequate coordination between donors appreciably reduces the overall effectiveness of aid projects.

(b) Structural adjustment support

The Community has become a major player in this field, providing the countries concerned with 10-30% of their total adjustment aid. The Community differs from most other donors, however, in that all this aid is provided in the form of grants.

Evaluations underline the relevance of this instrument, which enables the Community to provide effective support for stabilization programmes and pursue broader objectives than the more conventional programmes agreed by the governments with the IMF/World Bank: besides macroeconomic stabilization and the conditions for the development of the private sector, the priority accorded to priority sectors, and in particular education and health, is highlighted by the targeting of counterpart funds.

There is, however, room for improving the impact of what is potentially one of the most effective instruments, notably through:

• a deeper policy dialogue, the scope of which could be substantially increased by improved coordination within the Union;
• greater consistency between structural or sectoral adjustment support and the use of other instruments, which need to be better integrated into the overall strategic framework negotiated;
• support for budget programming and management in the recipient countries;
• the clarification of conditions and the improvement of monitoring procedures and, in the event of breaches, the practical repercussions thereof.

5. Commodities: the Stabex and Sysmin compensation systems

While the need to provide special support for restructuring in some sectors is not necessarily in question, a series of factors render these two instruments ill-suited to the present context:

• There has been a considerable change in the thinking that lay behind the development of this kind of aid, particularly concerning the role of the state in setting producer prices for commodities;
• The criteria governing eligibility, which depends on fluctuations in export earnings, and the initially automatic nature of payments have been much criticised because they can delay reforms.
• Sysmin and Stabex resources are best used for the purposes of diversification in the course of macroeconomic and sectoral reform. Their increasing use to promote reform in sectors recording losses of earnings places these instruments in the same sphere as the structural adjustment facility.

The introduction of frameworks of mutual obligations (FMOs) under Lomé IV marks a considerable improvement, since it imposes a systematic effort to use resources as effectively as possible. The slowness of disbursement remains a major handicap, however, and one that must be remedied.

6. The impact of trade preferences

Three key principles underpin the Lomé trade preferences: (i) stability: preferences are granted for long periods, i.e. the fourth Lomé Convention is a 10-year agreement (19902000); (ii) contractuality: preferences are jointly agreed, they cannot be modified unilaterally by the EU, and (iii) non-reciprocity: the ACP countries are not obliged to extend reciprocal preferences to EU exports.

Stability and contractuality are key elements of the Lomé trade preferences, since they provide a degree of security of access for ACP countries' exports to EU markets unmatched by any other existing non-reciprocal preferential arrangements such as the GSP schemes, thus reducing the inherent risks for economic operators in investing in export-oriented activities.

The Lomé trade preferences have provided, and still provide, important value to the ACP group in the sense of increasing the profitability to ACP exporters of sales on the EU market. Beyond the general offer of complete duty-free access for manufactures and processed products, and in particular the exemption from MFA disciplines of the preferences granted for textiles and clothing, individual ACP countries have benefited from the generous prices and guaranteed access for specific quantities within the Lomé commodity protocols (bananas, sugar, beef and veal, and rum) as well as from relatively liberal rules of origin. Revenue from the protocols accounts for a significant share of eligible countries' incomes.

The value of the Lomé trade preferences has, however, declined, and stands to suffer further erosion, as a result of multilateral liberalization (with the implementation of the Uruguay Round agreement), pre-accession arrangements with the Central and Eastern European countries, and the surge in EU-centred, regional trade arrangements.

Furthermore, as regards impact, in general the Lomé trade preferences have not been sufficient to enhance export growth and increase diversification. A simple glance at the statistics (see tables) seems to confirm this assessment. ACP countries' export performance and their performance in attracting foreign direct investment (FDI) deteriorated during the period in which they most enjoyed those preferences.

During the course of the Lomé Conventions the ACP countries failed to increase or even maintain market share in the EU, while less preferred exporters were able to raise their market share. The EU market remained relatively important for the ACP countries, which still depend on the EU for about 40% of their export earnings. Dependency on trade with Europe varies among ACP regions, being higher for Africa (46%) than for the Caribbean and the Pacific (18% and 23%, respectively).

In comparison with developing countries as a whole, the ACP countries have also recorded a much more modest overall trade performance during the last decade. Neither have they managed to diversify exports significantly and most still rely on a few primary products. FDI to African ACP countries doubled as a percentage of GDP between the mid-1980s and the early 1990s, to 1.2%. However, compared with other developing countries, Africa's share of FDI dropped from 6% to 4% of all FDI to all developing countries excluding China. Furthermore, most FDI to Africa is concentrated on the oilproducing countries.

However, individual success stories of export growth and diversification exist. Several exports that have enjoyed a relatively large preferential margin in terms of tariff preferences or exemption from quotas have expanded. A few countries, in particular those making the fullest use of preferences, have been able to attract significant amounts of FDI. Those ACP countries which have managed to diversify their exports into nontraditional products or benefited from the Protocols, such as Mauritius, Botswana, Côte d'Ivoire, Jamaica, and Zimbabwe, have gained from the Lomé preferences.

The reasons for ACP countries' poor overall export and growth performance, despite the breadth and depth of the Lomé preferences, are varied. Lack of critical factors such as infrastructure, shortage of entrepreneurship, low levels of physical and human capital, low levels of savings and investment and undeveloped financial sectors, on the supply side, have limited the benefits that could be derived from the preferences. High dependency on a few basic commodities subject to high price fluctuations and substantial deterioration in the terms of trade are important explanatory factors as well.

Furthermore, it is now widely believed that beyond political stability, which is a fundamental precondition for growth, and initial endowments, sound policies play a major role in influencing exports and growth. Macroeconomic stability, realistic and stable exchange rates, good institutions and good governance, and efficient resource allocation policies, in particular stable and credible import and taxation regimes, as well as reduced trade protection, which allow a transparent transmission of world price signals to domestic producers, are significant determinants of competitiveness and hence of export performance. These supply-side factors are now considered much more important than trade preferences in achieving high rates of export and economic growth.

ACP States as a group, and many sub-Saharan African countries in particular, have failed to meet those preconditions for achieving export-led growth. Being weak, because of poor initial endowments, they have also failed in respect of the policy-mix adopted, or, when they have adopted the right one, they have been weak on implementation, and have frequently reversed their policies. As a consequence, sub-Saharan African countries' economic policies and policy reforms have suffered from very low credibility in the eyes of economic operators, domestic as well as foreign. This has undermined and blunted not only the supply response to trade preferences, but also to any prospective policy reform.

Finally, the legal battles fought by the EU and the ACP countries in the GATT following the settingup of the single market for bananas led the European Community in 1994 to seek a "waiver" for the trade package of the Lomé Convention after a panel (non adopted by the GATT Council) found the Lomé Convention inconsistent in respect of the GATT due to non-reciprocity (which excludes the Convention from being considered a free trade agreement), and to discrimination vis-ŕ-vis other LDCs, which means it is not covered by the enabling clause allowing GSP schemes.

The fact that the waiver only extends until the end of the present Convention, that it must be reviewed annually and that issues linked to the banana trade arrangements applied by the EU are still not solved, has undermined the principles underpinning the Lomé trade preferences, in particular those of non-reciprocity and stability. The security attached to those preferences has been accordingly reduced.

C. Implications for future partnership

The main conclusion to be drawn from this critique of past policy is that the need to achieve results is becoming the driving force of Community development cooperation policy. Major reviews are under way in a number of areas, taking on board the results of evaluations aimed at improving the efficiency and impact of Community aid. The claim that Community development aid is peculiarly inefficient appears to be quite unfounded; no objective comparative study supports it. All aid donors are confronted with the need to review operations regularly and seek ways of maximizing the impact of their programmes. An evaluation of key factors limiting the effectiveness of ACPEU cooperation under the Lomé Convention should enable us to pinpoint factors contributing to greater success. The following questions will need to be addressed:

• the foundations of future partnership. The attempt to turn the Lomé Convention commitment to partnership into an everyday reality impinged upon its general effectiveness, with the result that the EU tended to adopt unilateral, interventionist approaches that were not conducive to ACP internalization of development policies or to each side accepting its own responsibilities. The tendency to step in to assume the development partner's responsibilities may be quite understandable in transitional phases, but it is no guarantee of efficiency, nor is it a viable proposition in the long term. It is a vicious circle, which needs to be broken by making a renewed commitment to partnership viewed this time as an objective to be achieved rather than a ground rule. This will require a new policy foundation and more effective dialogue, backed by a commitment by ACP governments to reform. It will also require greater flexibility in implementation;
• the EU's priorities and resource allocation criteria. If no clear priorities can be discerned from the breakdown of resource allocation by country over the last few decades, it is largely because the various instruments created have all added their own specific goals to the list. In its mid-term review of the fourth Lomé Convention, the EU committed itself to two priorities: focusing on the poorest countries, in accordance with the Treaty, and creating conditions for more efficient resource utilization. The new partnership must address these priorities, and ways of putting them into practice;
• aid conditionality and selectiveness. The problem of Community resource allocation criteria leads us on to the conditions attached to aid programmes. The effect of "conditionality" is to give more weight to performance-related criteria in resource allocation, but a consistent, universal approach to the issue has yet to be defined. There should, no doubt, be some scope for discretion in applying conditionality, in order to leave more to the initiative of recipient countries and emphasize their responsibilities. The way in which the Community addresses these issues will ultimately determine the degree to which Community aid is selective;
• capacity building. The evaluations concluded that it was vital to systematically identify any limitations in the recipient countries' institutions or economic policies which might make a development project less likely to succeed, and consider ways of overcoming them. That being so, the EU should surely consider giving higher priority to improving ACP States' institutions and their ability to conceive, implement and sustain economic and sectoral policies over a period of time. It should certainly consider building up their forecasting and planning capacity, although it raises political as well as strictly institutional issues;
• a new trade chapter. While the trade preferences enshrined in the Lomé Convention have a significant value, not only in terms of concrete concessions but also as regards the basic principles underpinning the trade partnership between both parties (non-reciprocity, stability and contractuality), it is widely considered that, in general, the impact of the Lomé trade preferences has not been sufficient to enhance growth and increase diversification.

  Some of the trends and features of the new global context, such as multilateral and regional liberalization, will have to be taken into account in particular the need to comply with WTO rules.

  More weight will need to be given to structural features of trade development, conditions for product diversification, and the creation of favourable conditions for export growth. Trade preferences are not sufficient in themselves to promote growth and diversification, although they provide opportunities that may tempt businesses and other economic players to develop particular product lines as part of a particular strategy. A broader approach to trade cooperation, linked to operations to support structural adjustment and the private sector, and reflecting ACP countries' need to create political and institutional conditions conducive to foreign investment, should help improve their ability to take advantage of trade preferences and, moreover, to diversify their external economic relations;

• rethinking aid and aid instruments. The impact of Community aid is less than the sum of its parts because of the way the Community has accumulated aid instruments, each one with its own rationale. Adopting a thematic approach and refocusing Community assistance on sectoral policies and agreed reforms should help make aid more efficient and increase its impact on economic and social conditions in ACP countries. Project aid should only be maintained within a specific institutional and policy framework, to tackle clearly identified, specific problems, where a transfer of know-how is needed. It should therefore improve targeting and speed up agreed reforms across the board or on a sectoral basis;
• the need for coordination. All the evaluations agree on one point: better liaison between donors, especially as regards policy dialogue, would improve the impact of many development operations.

Contents

Chapter 1  Chapter 3  Chapter 4  Chapter 5  Chapter 6

Updated on December 19, 1996

Developer's Note: These pages were developed for use on the Netscape browser. Please address comments to Peter Ballantyne, ECDPM