The EU spends almost €12 billion per year (2018 figures) outside the EU, mainly for economic cooperation and development aid, under the heading ‘Global Europe’ and through the European Development Funds (EDF). This corresponds to around 9.5% of the EU budget (including EDF expenditure). Spending this money, however, is subject to several conditions being met. But can we still speak about aid in view of these ‘conditionalities’, and who is helped by it: the recipient or the donor? Sven van Mourik is a doctoral student in history at New York University, researching Afro-European relations in the late 20th century and global governance issues. For his doctoral thesis he focuses on the conditionality of the EU’s external aid. In his article he questions whether this ‘conditioned’ aid really adds value in the long run to its recipients. Or whether it has different effects, be they intentional or not.
By Sven van Mourik, New York University
Beyond more or less aid
‘Why do we give so much money to Africa?’ This is the question raised repeatedly by Europe’s far right populists seeking to cut development aid. Simultaneously from the left, we hear clarion calls to increase aid budgets.
The EU gives development aid through two channels: aid given directly by its Member States and aid given through the EU budget and its European Development Fund (EDF), the EU’s main instrument to provide development cooperation aid. Currently the EDF budget amounts to slightly over €4 billion (€3.7 billion expenditure for 2018), while the EU budget provides economic and development aid through the heading ‘Global Europe,’ amounting to almost €10 billion (€8 billion expenditure in 2018). (1)
During the last two decades more and more economic and development aid has gone through EU channels. Reasons for this have been on the one hand economies of scale and speed aimed at more efficiency and impact, while on the other hand there was an urge to join forces and thereby reduce ‘competition’ between Member States’ development aid programs. So go the arguments which are often related to European added value, and which may even lead to savings for EU Member States or, if savings are used to increase the amount provided, benefits for recipient countries.
My hypothesis is that the problem with EU aid is not its amount, but that it is flawed in its conception and application. Beginning in 1990, European development aid — coming from both EU Member States and the European Commission — has become tied up with a deeply problematic macroeconomic agenda in the form of structural adjustment programs (SAPs), as formulated by the World Bank and the International Monetary Fund (IMF). Under the Lomé IV and Cotonou Conventions — the overarching framework for relations with African, Caribbean and Pacific countries, the European Commission has made a large part of its development aid conditional upon the implementation of such SAPs. The conventions promised relief from the consequences of the restructuring itself.
When the European Union promises aid for structural adjustment, they are not actually giving aid. Instead, they are using the EU’s financial support as leverage to impose a particular view of what a liberal market society should look like. EU aid conditionalities reflect a distinctly European vision for the Global South (2) and are implemented under the implicit threat of the humanitarian and financial disasters that aid withdrawal entails.
Adjustment in Greece
What makes structural adjustment so problematic? Let’s look at a recent example within the EU, Greece, in several ways revealing the outcome of experimentation with adjustment in the Global South. Following the 2008 crisis, a string of adjustment programs tried to spark economic growth to enable debt repayment. In exchange for bailout loans, Greece embraced budget cuts in health and education, minimum wage cuts, pension reform, privatization, deregulation, and tax hikes. This strategy of expansionary austerity was founded on the belief that by cutting wages, prices and public spending, a country could restore competitiveness and increase business confidence, which would lead to growing investment. These positive effects would ultimately outweigh the costs of austerity.
The programs had some unanticipated consequences. Between 2009 and 2013, a 25% cut in hospital and primary care funding resulted in a 32-fold increase in HIV infections. Infant mortality increased by 43 percent, and the suicide rate by 45 percent (3). Yet these cuts did not fix the debt problem, as indicated in Figure 1 on the evolution of Greek debt — despite 14 austerity packages imposed by the IMF, European Commission, and European Central Bank. As economist Stergios Skaperdas noted in 2015: ‘This level of debt is unsustainable and there is virtually no chance it will be fully paid back. Default is still a taboo but it is bound to occur in one way or another.’
Figure 1 — Evolution of Greek debt
The Greek case sparked heated discussions within Europe about the role of Germany, the European Central Bank, the IMF, and the European Commission. Historically, however, this was far from the first time the European Commission and the IMF have together designed adjustment programs for highly indebted countries. Just ask the Global South.
Adjustment in the Global South
It was in the wake of the 1980s debt crises that hit the Global South that SAPs exploded onto the scene. European and American banks experiencing excess liquidity had lent more than a trillion US dollars to developing countries in the 1970s. Following the oil shocks, these countries had difficulty servicing their debts. Repayment was put at the center of international development efforts, and Europe and the US embraced the structural adjustment program as formulated by World Bank President McNamara at the end of the 1970s. Much as for Greece, bailout loans were issued with a demand for macro-economic reform: by 1994, ‘more than 70 countries… [had] been subjected to 566 IMF and World Bank stabilization and structural adjustment programs (SAPs)’. (4)
What was in these programs? SAPs had two overarching objectives. The first was austerity: by lowering prices, wages, and public spending, a country would improve solvency, confidence and competitiveness in the world market. The second was to court private investment, mainly through privatization, anti-inflation measures, opening of capital markets, enforcement of first world patents and copyrights and relaxation of minimum wage laws and trade union rights. In a nutshell, structural adjustment promised to liberate market forces, promote foreign investment, and boost developing countries’ exports. This in turn would bring growth that would enable repayment of outstanding debts.
For 30 years the EU has promoted structural adjustment across the globe by making a large share of its development aid dependent on whether a country agreed to an IMF or World Bank program. Initially the EU was critical of adjustment: an influential report of the UN International Children’s Emergency Fund (UNICEF) had pointed out in 1988 that SAPs ‘posed life-threatening dangers to women, children, and the aged.’ But while it vowed to mediate the devastating social impact of SAPs, the EU fully embraced — and enforced — the macroeconomic framework set out by the IMF and the World Bank. If their conditions went unfulfilled EDF aid could be suspended, even if this, as the ECA has reported ‘led to severe interruptions of the implementation of food security programmes (…).’ (5)
Through aid conditionality, the EU became a little-known but impactful co-author in the global history of structural adjustment. It both reinforced SAPs and spread them to places where the World Bank and IMF had not yet gained a foothold. EU aid helped cement SAPs as a gold standard of credibility for the Global South, the only way for poor indebted countries to access new credit or aid. Thus, the EU bears direct responsibility for the complicated legacy of SAPs.
The legacy of adjustment
So did SAPs work? As Figure 2 regarding ballooning Developing World debt shows, they have not fixed developing countries’ debt levels — their original purpose. In fact, debt servicing over the first ten years of the debt crisis exceeded what these countries had originally owed in 1982, yet by 1992 their debt had doubled. Although the EU has helped promote debt relief through the Heavily Indebted Poor Country (HIPC) initiative, unrepayable debt has ballooned into a structural feature of North-South relations. For example, while African countries received $19 billion in aid in 2015, they had to pay $18 billion in interest on old loans. (6)
Figure 2 — External debt development for Developing World countries
Developing Countries’ (Low and Middle Income) total external debt stocks. Source: World Bank open data site: External debt stocks, Net Official Development Assistance and Official Aid Received, Debt service on external debt SAPs impacted the Global South in other ways. In 2002, a group of NGOs and civil society organizations, backed by the UN, the EU, and initially the World Bank (which later dropped out), published A Multi-Country Participatory Assessment of Structural Adjustment . Through interactions with civil society in ten countries (Bangladesh, Ecuador, El Salvador, Ghana, Hungary, Mexico, Uganda, the Philippines, and Zimbabwe) it reported some common consequences for societies under SAPs:
- destruction of domestic manufacturing;
- widespread bankruptcy of small and medium-scale enterprises;
- higher unemployment rates — and consequently higher income inequality;
- environmental degradation;
- decline in health and education services;
- political destabilization.
Those first two effects of SAPs were anticipated, if not desired. Following the theory of comparative advantage, countries across the Global South had few businesses that could produce goods more efficiently than the Global North produced them, whether that be machines, medical supplies, or even food. The Global South should focus on their own advantage, which was generally the export of raw materials. While primary product exports did grow following the SAPs, profits went largely to Western multinationals. According to the same logic, these multinationals were more technically advanced and efficient in extracting the resources than domestic counterparts — and so they were often commissioned to do the job, sometimes accompanied with most beneficial (tax) conditions.
Why has structural adjustment not enabled countries to repay their debt? On the one hand, structural adjustment has put negative pressures on government income. Government firms were privatized and bought up by Western corporations that take most of the revenue (for there were few domestic investors). Local bankruptcies led to decreased taxes. Profits from exports went and still go increasingly to Western multinationals. And tariffs, which were an important source of income for most African states, were abolished in the name of trade liberalization.
On the other side, expenses went up. Businesses across the Global South went bankrupt, and essential goods had to be bought on the world market. While currency devaluation increased exports, it also made imported products more expensive. Thus, SAPs have kept the Global South ensnared in a position of economic underdevelopment.
The most staggering legacy of SAPs is their impact on health. A 2017 study concluded that austerity cuts in government health expenditure globally and in sub-Saharan Africa particularly have led to ‘medical supply shortages, loss of human capital [due to brain drain], and replacement of defunded maternal health services with ineffective traditional birth attendant programs.’ Privatization and deregulation of water and sanitation facilities increased reliance on unsanitary water, while user fees for health centers could lead to a 52% decrease in visits. Overall, the study linked the presence of an SAP in a country to an increase in infant mortality and maternal deaths during childbirth.
Today, SAPs exacerbate the impact of coronavirus. The current crisis in Ecuador, for instance, followed ‘six years of fiscal austerity measures endorsed by the IMF, including a fall of 64 per cent in public investment in the health sector in just the last two years.’ Such fiscal austerity measures have continued throughout the pandemic, and Ecuador is not alone: ‘Of the 57 countries last identified by the WHO as facing critical health worker shortages, 24 received advice from the IMF to cut or freeze public sector wages.’
Increasingly, there is little alternative to adjustment for indebted countries, including, most recently, Greece. From the US treasury to the African Development Bank and the Paris Club of bilateral creditors: an IMF or World Bank program has become an almost universal prerequisite for vital credit. Even the Heavily Indebted Poor Country initiative of the late 1990s, itself a program of debt relief, was made conditional upon accepting an IMF program. Today traditional centers of the developed world like the Netherlands, Germany and the UK are voluntarily taking up austerity and other elements of structural adjustment, believing it will boost their credibility.
The ‘maladie’ of conditionality
Historical data show that SAPs did not have to meet concrete humanitarian, developmental or economic objectives in order to take the world by storm — on the contrary. As in Greece, the one essential may have been the illusion of repayment. For even if adjustment does not deliver, the permanent austerity of the indebted country forestalls default because austerity comes with new loans, thus protecting the investments of Western banks and governments. This mechanism is most visible in the endless rescheduling of debt in the Paris Club of bilateral creditors. Meanwhile, cash-strapped poor countries are left with no alternative but to accept more adjustment in exchange for new credit.
If aid-receiving countries have not profited from SAPs, who has? To simplify: while inflows to sub-Saharan Africa totaled $162 billion in 2015, some $203 billion in financial resources left — with a whopping $68 billion disappearing through ‘illicit financial flows,’ used by multinationals to channel revenues to overseas tax havens7. Besides Western multinationals, Western banks have also profited. In the first ten years of the 1980s debt crisis, the developing world repaid what it owed and nevertheless ended up in twice as much debt. This means, from the perspective of added value, that EU SAPs’ conditions may have provided added value for EU businesses — particularly banks — but at a tremendous cost for the developing world. And still do. While a new jubilee movement advocating debt forgiveness for the Global South is gaining traction, there is a growing recognition that more is needed: we need to take a look at the system that keeps producing this unrepayable debt.
SAPs have caused just the sort of widespread humanitarian crises they ostensibly sought to relieve, and placed countries in economically dependent and stagnant positions instead of restoring their economies to growth and independence. But for the EU, the root of the problem may lie with conditionality itself. Where EU aid was unconditional throughout the first three Lomé Conventions (1975–1990), SAPs opened the door for specific Member State demands. Human rights, environmental protection and other European priorities for the Global South were inserted into aid packages during the 1990s and then through the budget support mechanism of the Cotonou Convention (2000–2020).
While we may like the idea of liberal market societies that follow human rights and protect the environment, attaching such conditions to EU aid amounts to liberal imperialism. Behind a paradigm of ‘partnership’ and ‘dialogue’ lies a reality of gradual but inevitable adjustment of poor countries’ economies and politics to European norms and standards. Not only is vital aid imperialistic when it comes with strings attached. Such strings distract us from the real questions: how do we Europeans continue to profit from the underdevelopment of the Global South, and how can we better align our economics with our humanitarian aspirations? What kind of priority do we give to these latter European values?
When the question arises of why we give so much aid to Africa, we should take this opportunity to focus on the why and move beyond discussions about how much. Packing aid with EU conditionality, such as embedded in SAPs, shifts the focus in answering the key question of what the added value — also in the long term — will be, towards the European donors instead of the recipients of EU aid. While presented as a gift to developing countries, long term benefits for the donors may well outweigh the benefits for the recipients. This is no longer aid, since we have shifted from a humanitarian to an altogether different kind of agenda.
(1) See also the ECA annual reports 2018 (Chapter 9 and the ECA’s 2018 report on the EDF)
(2) The Global South is a term used by the World Bank and other organizations to distinguish the North-South divide. The Global South includes Asia (with the exception of Japan, Hong Kong, Macau, Singapore, South Korea and Taiwan), Central America, South America, Mexico, Africa, and the Middle East (with the exception of Israel).
(3) Mark Blyth, Austerity: The History of a Dangerous Idea, 2013, page 258.
(4) Walden Bello with Shea Cunningham, The World Bank and the IMF, North South View, July 1994.
(5) See ECA special report 2/2003, paragraph 69
(6) Karen McVeigh, World is plundering Africa’s wealth of ‘billions of dollars a year,’ 24 May 2017.
This article was first published on the 3/2020 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.