It's (almost) final: EU to slash aid to middle-income countries

Flags at the European Parliament. After more than two years of prolonged and at times contentious negotiations in Brussels, the European Union is now poised to scale back its aid to middle-income countries. Photo by: European Parliament /CC BY-NC-ND

After more than two years of prolonged and at times contentious negotiations in Brussels, the European Union is now poised to scale back its aid to middle-income countries.

The EU is now in the final stages of adopting the European Commission’s aid differentiation policy, which would refocus its aid spending on poorer countries where it believes it can achieve the greatest impact — in line with the Agenda for Change reform drive. In 2012, only 29 percent of bilateral aid from the EU flowed to least-developed and low-income countries.

“We cannot work with China or Brazil as we work with, say, Liberia or Zambia. The EU must seek to target its resources where they are needed most and where they can make the most difference,” explained Alexandre Polack, the European Commission’s representative for development.

Budget pressures in Brussels — where the parliament recently signed off on a slight increase in EU development aid through 2020 — have bolstered the European Commission’s case for aid differentiation.

“You’ve got to think about where you get most bang for your buck with the money and therefore a focus on least-developed countries and the most vulnerable countries — in my view — is right especially when there are emerging economies that are growing fast and able to, in a way, finance their own poverty problems,” Mikaela Gavas, a research fellow at the Overseas Development Institute, asserted.

Heeding calls from European lawmakers, the EU intends to phase out or reduce assistance to middle-income countries gradually over several years.

The EU is only the latest donor to cut back on its aid engagement in middle-income countries. Over the last year and a half, the United Kingdom has announced plans to ax its bilateral aid programs in India and South Africa.

16 DCI countries to graduate from bilateral aid

In the Development Cooperation Instrument, the EU’s main aid funding stream for South Africa, Latin America and Asia, 16 middle-income countries are set to become ineligible for bilateral assistance beginning this year, sources familiar with the DCI negotiations told Devex.

The EU is expected to formally adopt this consensus as early as March, when the 2014-2020 DCI is approved by the Council of the European Union. The EU has budgeted 19.7 billion euros ($26.7 billion) for DCI over the next seven years, roughly flat from 2007-2013 levels.

The three bodies which have a say on the DCI regulations — the European Commission, European Parliament and Council of the European Union — have broadly agreed to discontinue bilateral aid through DCI to both upper-middle-income countries and economies whosegross domestic productrepresents more than 1 percent of globalGDP— a roster that counts 21 of the 46 DCI countries.

Indonesia and India — the two lower-middle-income countries that meet the second criteria — are the largest among the bilateral EU aid programs on the chopping block. Between 2007 and 2013, the EU had allocated 494 million euros in regional and bilateral aid to Indonesia, and 470 million euros to India. In addition to India, two other BRIC countries — Brazil and China — would also become ineligible for bilateral aid from DCI.

But there are exceptions. The European Commission and the European Parliament have successfully negotiated for some countries to be exempted from DCI’s aid differentiation criteria — initially at least for an unspecified phase-out period.

Despite their upper-middle-income status, South Africa and Cuba are expected to remain eligible for bilateral aid through DCI, in large part at the urging of the European Commission. South Africa — among the top recipients of EU aid — may have been spared from aid differentiation because of its reputation in Brussels as a successful aid program, according to Gavas.

At the same time, the European Parliament lobbied for upper-middle-income countries Ecuador, Peru and Colombia, further whittling down the list of countries that would become ineligible for bilateral aid to 16. Lawmakers’ reluctance to sever development ties with Latin America — particularly among the Spanish delegation — seems to have fueled the push for Ecuador, Peru and Colombia to remain on the EU’s bilateral aid portfolio.

Reduced aid levels for MICs in EDF

Meanwhile, in the European Development Fund — the EU’s main aid funding stream for Africa, Caribbean and the Pacific — middle-income countries are slated to see reduced aid levels through 2020. Each of the 77 EDF countries will, however, remain eligible for assistance.

EU member states, which provide voluntary contributions to EDF, have set aside 30.5 billion euros for the fund through 2020 — a modest increase from 2007-2013 levels.

According to a forthcoming technical note from the German Development Institute’s Mario Negre, least-developed and low-income countries would see their share of the EDF increase from 79.5 percent to 85.3 percent under the European Commission’s proposed allocation formula, which is now under discussion by EU member states. The EDF has historically been much more focused on poorer countries than DCI.

The 21 upper-middle and high-income countries in EDF are likely to be the hardest hit by aid cuts. For instance, ODI’s Gavas predicts Mauritius, Seychelles and Namibia could see an 80 percent, 70 percent and 40 percent cut in their EDF share, respectively.

The European Commission’s Polack anticipates that most EDF country allocations will be revealed by the end of 2014. DCI country allocations — which are expected to be rolled out from March to September — could be influenced by the EDF allocation formula.

Civil society funding protected

Both EDF and the DCI’s bilateral programs channel assistance mainly to governments of beneficiary countries in the form of budget support or programmed funding. To the relief of some civil society organizations, the EU’s more modest thematic aid programs — which course the bulk of funding through CSOs — have been spared from cuts by negotiators in Brussels.

The EU thematic aid program that is dedicated to civil society groups and nonstate actors is even slated for a sizable increase in funding — from 1.6 billion euros in 2007-2013 to 1.9 billion euros in 2014-2020.

Civil society engagement has emerged as a key theme of EU development chief Andris Piebalgs’ agenda at the European Commission. In 2012, the Commission unveiled a much anticipated communication that underscored the role of civil society groups in global development.

By protecting its thematic aid programs, the European aid program has demonstrated that it “places a lot of importance on civil society,” ODI’s Gavas argued.

Others are more skeptical of Brussels’ commitment. Karine Sohet, policy officer for APRODEV, a coalition of European development organizations, pointed out that the European Commission has recently downsized development staff, including in the graduating DCI countries. According to Sohet, the staff reductions at the EU delegations could limit the institution’s capacity to engage with civil society groups on the ground.

In any case, the European aid program’s apparent ring-fencing of civil society funding doesn’t mean that Brussels is abandoning its longstanding preference for government-to-government aid. In 2012, EU institutions channeled only 4 percent of their aid spending through nongovernmental and civil society organizations.

Lingering doubts

With the implementation of the aid differentiation policy just weeks away, EU aid officials are keen to emphasize that Brussels isn’t about to pull the plug on development cooperation with middle-income countries.

“We are aware that in middle-income countries there are still huge pockets of poverty and the EU will not ignore them,” the European Commission’s Polack said. “We will work on developing our mutual relationships with middle-income countries in a more strategic way.”

The 16 countries slated to graduate from DCI’s bilateral envelope will remain eligible for the EU’s thematic and regional cooperation programs, including eight regional blending facilities. Some in the aid community have touted blending — a development financing model that matches grants with loans — as a practical alternative to traditional aid.

Still, many others contend that aid differentiation is a step in the wrong direction for the European aid program, as it fails to recognize the needs of the nearly 1 billion poor people living in middle-income countries.

“In my personal opinion, the European Commission has relied too much on the income category,” argued Sian Herbert, a research fellow at the University of Birmingham who has studied EU aid to middle-income countries extensively. “For example, in South Africa, 10 percent of the population [have] HIV/AIDS. It doesn’t matter whether it’s an [upper-middle-income country] — it still suffers from severe development issues.”

Consultations on the impact of the aid differentiation policy are underway between the European Commission and its development partners in the DCI and EDF countries. For now, at least, the reaction in the graduating countries has been muted — hardly a surprise in countries such as India, where the government has been openly dismissive of foreign aid.

Lenin Raghuvanshi, CEO of the EU-funded NGO People’s Vigilance Committee on Human Rights, said the Indian government doesn’t speak for him and urged the EU bilateral aid program to reconsider its pullout from India.

“[Aid] is not peanuts,” Raghuvanshi said, referring to the now-Indian president’s comments on the U.K. aid program. “Hopefully, the EU will take public opinion, not just the bureaucrats’ opinion.”

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About the author

  • Piccio

    Lorenzo Piccio

    Lorenzo is a former contributing analyst for Devex. Previously Devex's senior analyst for development finance in Manila.