EU development cooperation in middle-income countries? The state of play of the negotiations Mikaela Gavas 9 May 2013

Introduction 1.Differentiation and its rationale a.Five overlapping objectives b.Levels of differentiation 2.EU institutional approaches to differentiation in the DCI a.What aid allocation criteria? b.How to apply the criteria? c.Cutting or phasing out? 3.Differentiation and the EDF 4.Member State approaches to differentiation 5.Milestones in the negotiations

EU policy on differentiation and its rationale

Five overlapping objectives 1. To target resources where they are needed most 2. To target resources where they could have the greatest impact and value for money 3. To shift relations with some emerging countries towards a partnership based on mutual interest 4. To respond better to the specific needs / capacities of each country 5. To focus more on certain geographic regions and less on others

Levels of differentiation 1.Differentiated eligibility to development assistance (i.e. ‘graduation’) 2.Differentiated volumes of development assistance 3.Differentiated mix of policies and instruments

Eligibility and volume of development assistance  Based on: need, performance, capacity, commitment & potential EU impact Level 1:  Criteria for eligibility for grant-based bilateral aid: – UMICs according to the OECD-DAC – More than a 1% share of global GDP – Other factors also considered (Human Development Index, Economic Vulnerability Index, aid dependency, economic growth levels and foreign direct investment) Level 2:  Criteria for levels/volumes of development assistance (TBD)

Differentiated mix of policies and instruments  Differentiated development partnerships funded through thematic envelopes and the Partnership Instrument: – Loans (esp. blending of loans and grants) – Technical cooperation – Support for trilateral cooperation Adapted from Altenburg and Koch, DIE, 2011 Grant and subsidy-based aid Myanmar Less concessionary: blended finance, still ODA, but less through aid agencies India China OECD-type cooperation: peer learning, institutional twinning, fully co- financed Korea

EU institutional approaches to differentiation in the DCI

What aid allocation criteria? 9 Focus on income and size of economy. Countries should graduate if: UMICs according to the OECD-DAC More than a 1% share of global GDP Other (HDI, EVI, aid dependency, economic growth levels and FDI) Focus on income and size of economy. Countries should graduate if: UMICs according to the OECD-DAC More than a 1% share of global GDP Possibility to maintain geographic programme in ‘exceptional cases’ Focus on human development, people poverty and inequality. UMICs should be eligible if they score: Below 0.75 on the Human Development Index Above 10% of the poverty headcount ratio Above 4% on the Poverty Gap Index Above 45% of the Income Gini Coefficient

How should the criteria be applied? 10 Allow for a few named exceptions 19 countries to lose grant-based bilateral aid: 17 UMICs and 2 LMICs 2 exceptions: Cuba and South Africa Allow for an exception clause without naming countries 21 countries potentially lose grant-based bilateral aid: the 19 proposed by the EC, plus Cuba and South Africa. No named exceptions, but a clause could allow for exceptions at a later stage Allow for an exception clause, and a few named exceptions 16 countries to lose bilateral grant-based aid: 14 UMICs and 2 LMICs 5 exceptions: Colombia, Cuba, Ecuador, Peru and South Africa A clause could allow for more exceptions at a later stage

Should aid be cut or phased out? 11 No new grant-based bilateral aid funds will be committed or disbursed after 2014 Phase out in ‘exceptional cases’ Phase out in ‘exceptional countries’ with vulnerable constituencies

Differentiation and the EDF

A different approach for the EDF ‘…what we intend to propose is strong differentiation according to the level of income. But for the Caribbean I have a bit of a soft spot because the countries are vulnerable to two major challenges: climate change and natural disasters. It is the same with the Pacific…They are vulnerable economies that in a way deserve some attention even if the income per capita is there’ (Commissioner Piebalgs) Differentiated eligibility will not be applied (level 1) But, there will be increased differentiation of aid volumes and instruments (levels 2 and 3) Should the same criteria be used? 13

21 UMICs in the EDF: Differentiation and the EDF: potential implications Less than 1% of the EDF’s poor live in the EDF-21 countries But, 17 out of the 21 score high on the Environmental Vulnerability Index

Differentiation and the EDF: potential implications Transition from 9 th to 10 th EDF

Member State approaches to differentiation

4 groups of Member States 17 Clear criteria with no exceptions Clear criteria with flexibility to include or exclude countries Clear criteria with specified exceptions Sceptical of criteria and country list

Milestones in the negotiations MFF: February 2013 – European Council agreement on the figures for the MFF ( ) March 2013 – European Parliament rejects European Council agreement April 2013 – European Commission proposal for allocating funds across the instruments for external action May 2013 – Council, Parliament and Commission agree to restart negotiations on the future EU budget DCI: June 2012 – Council’s Partial General Agreement on the DCI September European Parliament’s negotiating position on the DCI EDF: December European Commission proposal for the 11 th EDF March 2013 – European Parliament own initiative report on the 11 th EDF