UN Chronicle | Financing for Development - The Role of the European Union in Development Assistance and in Increasing ODA

Financing for Development
The Role of the European Union in Development Assistance and in Increasing ODA
By Poul Nielson

Article

In March 2002, the International Conference on Financing for Development, held in Monterrey, Mexico, addressed the major challenge of mobilizing the financial resources necessary for the implementation of the Millennium Declaration's development targets, such as halving world poverty by the year 2015. Counting on increased mobilization of resources at the domestic level, economies in developing countries would have to grow at an average of 7 per cent per year until 2015 to finance these goals, which will be very difficult to achieve. In addition, calculations presented by the World Bank and the International Monetary Fund indicate that reaching those targets would require a doubling of the official development assistance (ODA) from the current level of $50 billion to $100 billion per year.

Private resource flows over the last years have become the major driving force of development. ODA, however, still plays an essential role as a complement to other sources of financing for development. This applies especially to those countries with the least capacity to attract private direct investment, those with small markets and in difficult geographical locations, etc. ODA also remains the crucial instrument for supporting education, health, public infrastructure development, agriculture, rural development and food security. For many least developed countries, small island developing States and landlocked developing countries, ODA is still the largest source of external financing and will remain critical to the achievement of the goals and targets of the Millennium Declaration and other internationally agreed development targets.

The European Union (EU) is the world's biggest provider of development assistance. In 2001, the Community and its 15 member States provided more than $26 billion, which represents more than 50 per cent of the world's total ODA. While the average contribution of the Organisation for Economic Cooperation and Development (OECD) countries for assistance was 0.24 per cent of gross national income (GNI), the Union's average was considerably higher, namely 0.33 per cent of GNI.

Following its renewed commitment to the UN target at the 2001 European Council in Göteborg, Sweden, the Union decided to step up its development assistance. In March 2002, member States made a dual commitment at the European Summit in Barcelona (Council Conclusions, European Council, 15 and 16 March 2002).

Member States that have not yet reached the UN goal of 0.7 per cent of GNI committed themselves to increasing their ODA volume, while other countries renewed their efforts to remain at or above the 0.7 per cent target. Collectively, this means that the EU committed to increase development aid spending to an average of 0.39 per cent of GNI by 2006. This could mean an extra $7 billion a year in Union aid by 2006 and an additional cumulative $20 billion to development cooperation between now and 2006. As such, the Monterrey Conference proved to be a milestone on the path towards the UN target.

Member States will be responsible for mobilizing, managing and disbursing this increase. Within their respective budget allocation processes, all EU member States will in any case strive to earmark at least 0.33 per cent of their GNI to ODA by 2006. Today, four of the five OECD members that have reached the promised level of 0.7 per cent of GNI to be spent on ODA are EU members. More recently, Finland, Belgium, Ireland and France committed to meet or exceed the 0.7 per cent target within the next coming years; others have set intermediate targets higher than the EU benchmark. The United Kingdom announced an increase by 2005 of around $2.2 billion in its annual ODA budget, raising the GNP ratio from 0.32 to 0.4 per cent.

Each EU member State needs to draw up a clear road map setting out how it intends to reach this goal. Members have asked the European Commission to monitor the follow-up of the Barcelona commitments; a first report will be presented to them in May 2003. Nevertheless, for this financial commitment to produce results in reducing poverty and making development sustainable, an increase in volume needs to be matched by continued improvement in effectiveness.

At the EU level, special attention will be dedicated to the principles of coherence, coordination and complementarity between member States policies in order to enhance the overall effectiveness and visibility of Union aid. Since 2002, the European Union has taken concrete steps towards enhanced policy coordination and procedure harmonization, in partnership with other donors and in respect of the principles of partner-country ownership. Its two major initiatives in water and energy, launched at the World Summit for Sustainable Development in Johannesburg, South Africa, emphasize operational coordination and complementarity, both at the policy level and the implementation stage.

The development of partnerships with developing countries, other donors, the private sector and civil society should support that goal. The Commission also made a far-reaching proposal towards the untying of aid in view of better aid effectiveness. Of course, one could argue that aid is not, or even should not be, the solution for the financial problem.

Trade and economic growth in developing countries are also relevant and, from a point of view of sustainability, most likely preferable. The Monterrey Conference also stressed the importance of other initiatives related to the effectiveness of aid, the reform of the international financial system, trade and development, debt sustainability, global public goods and innovative sources of financing. The European Commission is committed to advocating change and actively monitoring the concrete steps to be made in those areas as well.

Source: World Investment Report 2002. UNCTAD, Foreign Direct Investment/Transnational Corporation (FDI/TNC) database and OECD Development Assistance Committee, International Development Statistics, online databases.

For example, the impact of the external policies of the European Union must be complemented by the reform of the Common Agricultural Policy (CAP) and the effective implementation of the "Everything But Arms" (EBA) initiative, as they both contribute to enhancing coherence. The Commission's proposal for a substantial reorientation of CAP has to be understood also in that context. The proposals, put forward in 2002 for greater decoupling of subsidies from production and reduction on guaranteed prices, are positive signs of efforts to increase market orientation of CAP. This, in turn, is likely to reduce its negative impact on third countries and enhance coherence with the European Community's development policy. In addition, EBA has removed all the quantitative and tariff barriers to the EU market for least developed countries, with the exception of bananas, rice and sugar, where transitional periods have been agreed before full liberalization is granted.

European Commission and UN Strengthen Partnership

European Union Commissioner Poul Nielson and UN Deputy Secretary-General Louise Fréchette signed on 29 April in New York an updated Financial and Administrative Framework Agreement (FAFA), which will pave the way for a closer strategic partnership between the European Commission and the United Nations in the fields of development and humanitarian aid.

At the signing ceremony, Mr. Nielson commented: "The European Union and the United Nations are close and natural partners in promoting development and humanitarian relief all over the world. It is with great satisfaction that I note we have come a long way to facilitate cooperation at the technical level between our two institutions." Initially concluded in 1999, FAFA manages the way in which European Commission funds are handled by the UN system, and it has been reviewed to address shortcomings in the original Agreement. A driving force behind the changes is a desire between the Union and the UN to see joint cooperation expand and to make Commission funding of UN operations and programmes at the technical level less cumbersome. The new Agreement provides the two sides with an improved tool in their joint efforts to strengthen global governance and multilateral institutions.

Concretely, FAFA will lower the transaction costs of joint projects or programmes, thereby helping the institutions to make better use of their resources for development and humanitarian relief to benefit those in need. By increasing the predictability of the rules for all parties concerned, it will contribute to greater transparency and impact of the operations on the ground. Among the newly revised principles are: moving from project funding to more long-term programme funding; shifting from a focus on inputs to one based on outputs and results; strengthening the visibility of the Union as a donor; and clarifying and simplifying rules on reporting. Yearly consultations will be held to identify ways of further fine-tuning the performance of the Agreement.

FAFA will be implemented by way of two standard contribution agreements: one for humanitarian aid and another for all other Commission grants. Similar agreements that exist with a number of UN specialized agencies, such as the Food and Agriculture Organization of the United Nations, United Nations Educational, Scientific and Cultural Organization and World Health Organization, will be reviewed. These and other UN agencies will be invited to accede to the updated FAFA and incorporate its principles to the greatest extent possible.

Biography

Poul Nielson is Commissioner for Development and Humanitarian Aid in the European Commission and served as Denmark's Minister for Development Cooperation from 1994 to 1999.

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