Approaches to Poverty Eradication and Economic Development IV
Bridging the EU development gaps
A European Union (EU) document posted on its website, and last updated in May 2004, says: "Although the European Union is one of the richest parts of the world, there are striking internal disparities of income and opportunity between its regions. The entry of 10 new member countries in May 2004, whose incomes are well below the EU average, has widened these gaps. Regional policy transfers resources from affluent to poorer regions. It is both an instrument of financial solidarity and a powerful force for economic integration."
The same document says: "Inequalities have various causes. They may result from longstanding handicaps imposed by geographic remoteness or by more recent social and economic change, or a combination of both. The impact of these disadvantages is frequently evident in social deprivation, poor quality schools, higher unemployment and inadequate infrastructures." It continues: "The EU policy to reduce regional disparities is built on four structural funds:
- the European Regional Development Fund (ERDF), (which assists regions whose development is lagging behind and those undergoing economic conversion or experiencing structural difficulties);
- the European Social Fund (ESF), (which mainly provides assistance under the European employment strategy);
- the section of the EU's common agricultural fund devoted to rural development, (to help in the development and structural adjustment of rural areas whose development is lagging behind, by improving the efficiency of their structures for producing, processing and marketing agricultural and forest products);
- financial support for fishing communities as part of the common fisheries policy (CPF), (to support restructuring in the fisheries sector.
"The funds will pay out about 213 billion (Euros), or roughly one third of total EU spending, between 2000 and 2006.
"A further 18 billions (Euros) is allocated to the cohesion fund, set up in 1993 to finance transport and environment infrastructure in member states with a GDP less than 90% of the Union average at the time (Greece, Ireland, Spain and Portugal)."
Another EU document says: "Most structural fund assistance is granted in the form of non-repayable grants or 'direct aid', and to a lesser degree refundable aid, interest-rate subsidies, guarantees, equity participation, and participation in venture capital."
To indicate the focused attention of the EU on the challenge of development within its member states, let us quote from another EU document that discusses the ERDF.
It says: "As part of its task to promote regional development, the ERDF contributes towards financing the following measures:
- Productive investment to create and safeguard sustainable jobs;
- Investment in infrastructure which contributes, in regions covered by Objective 1, to development, structural adjustment and creation and maintenance of sustainable jobs, or, in all eligible regions, to diversification, revitalisation, improved access and regeneration of economic sites and industrial areas suffering from decline, depressed urban areas, rural areas and areas dependent on fisheries. Such investment may also target the development of trans-European networks in the areas of transport, telecommunications and energy in the regions covered by Objective 1;
- Development of the endogenous potential by measures which support local development and employment initiatives and the activities of small and medium-sized enterprises; such assistance is aimed at services for enterprises, transfer of technology, development of financing institutions, direct aid to investment, provision of local infrastructure, and aid for structures providing neighbourhood services;
- Investment in education and health (only in the context of Objective 1)."
"Objective 1 promotes the development and structural adjustment of regions whose development is lagging behind, i.e. whose average per capita GDP is less than 75% of the European Union average. These regions show a deficit in socio-economic development in that they have:
- a low level of investment;
- a higher than average unemployment rate;
- lack of services for businesses and individuals; and,
- poor basic infrastructure.
"The Structural Funds support the takeoff of economic activities in these regions by providing them with the infrastructure they lack, encouraging investment in businesses and supporting human resource developments appropriate to the region." To illustrate the detail entailed in the implementation of the Regional Policy of the EU, we will cite only one development example, a section of Berlin, the capital of the Federal Republic of Germany. Of this section the EU says that it has not been affected by growth and development in the rest of the city. It is therefore seen as a "negative area".
"Urban waste areas and abandoned production areas or railway sidings give an impression of disunion, the unrelatedness of isolated fragments or of an insular situation within the city. "Population is dwindling; they younger inhabitants are moving out, leaving the old people behind. Parallel to this situation, foreign immigrants and latter-day Р№migrР№s from the CIS [Commonwealth of Independent States] countries are moving in. The unemployment rate is 50% above the federal average, and one in four unemployed persons has been out of work for over two years, which is the definition of long term unemployment. There is a high degree of dependence on social aid, and the educational level is low. The eligible area is a stage for radical right-wing groups and has a high crime rate, typical of major cities.
"The economic restructuring that followed re-unification has led to massive damage in the manufacturing sector: industrial sites were abandoned, and few plans have been put forward to re-use them as yet. This economic thinning-out has had an impact on individual commerce and on service and artisan enterprises, especially since they are under pressure from competition from large-scale distribution centres." The foregoing demonstrates the detailed meticulous preparatory work that is done to ensure that the focus on each development region is correct and effective. The comments above relate to an area of Berlin with a population of only about 30,000. This is less than 1% of the population of the city, and 2.3% of the population falling within an Objective 1 development area. The EU developmental interventions in Berlin include overcoming labour market and economic barriers; overcoming habitat and ecological barriers; overcoming social, ethnic, cultural and communication barriers; and providing technical assistance to ensure local implementation, monitoring and assessment of the development programmes.
The US Mission to the European Union has published some documents to assist US corporations interested to do business within the EU. One of these discusses the economic programmes that result from the implementation of the Union's Regional Policy. It makes the following important points: "Most EU funding is not paid directly by the European Commission to private beneficiaries, but via the national and regional authorities of the Member States. "Structural Fund grants are given to national, regional and local authorities for, among others, infrastructure and industrial, projects in such areas as telecommunications, energy, tourism, environment, transport, health, education, etc. "Projects most likely to receive (Structural Funds) money are those that contribute to EU priority objectives: development and structural adjustment of underdeveloped regions, economic and social conversion of areas facing structural difficulties, and adaptation and modernisation of policies and systems of education, training and employment.
"Most Structural Fund projects are assessed/approved by relevant local/regional authorities." All studies indicate that the EU Regional Policy is succeeding in its objective to reduce and eradicate poverty and underdevelopment among the Member States of the Union. The Observatory for International Library Programmes (OPIB) has this to say on this important matter: "For many years, the regional disparities in levels of development and standards of living - which existed well before the Community was created - were dealt with entirely by the Member States concerned. There have been clear improvements since the European Union started trying to reduce these disparities: average per capita income in the three least prosperous countries (Greece, Portugal and Spain) increased from 68% of the Community average to 79% in 1999."
An August 2002 study of "The Economic Impact of EU Regional Policy in Objective 1 Regions" confirms that this improvement in the less developed regions of the EU will continue during the 2002-2006 EU development period. It says:
"The Community objective 1 interventions are expected to have the highest impact on GDP in Portugal and Greece, where the average yearly level of GDP for 2002-2006 is expected to be 3.5% and 2.4% higher than it would otherwise have been (without EU development funding). "In Portugal and Greece the yearly average level of Gross Fixed Capital Formation throughout the period is respectively 8.9% and 8.1% higher than it would otherwise have been." The EU interventions will also help to restructure and modernise the economies of the less developed regions, reducing their dependence on primary products. In its 2003 report, "Competitiveness, sustainable development and cohesion in Europe: from Lisbon to Gothenburg", the EU says: "The Objective 1 programmes should help the economies of the six most backward regions covered by the study to catch up and restructure. Industrial production should increase in absolute terms, with the GDP share of agriculture and the processing of agricultural products falling and the share of services increasing."
It continues: "The instruments of solidarity, the Structural Funds and the Cohesion Fund, have a major impact on the competitiveness of regions and contribute significantly to improving the living conditions of their citizens, particularly in the poorer regions. About one third of GDP increases in the worst-off regions is estimated to be attributable to transfers from structural instruments." It then goes on to say: "The ex post evaluation of Objective 2 regions (regions affected by industrial decline, covering 16.3% of the EU population) for the period 1994-99, which was carried out in 2003, concludes that the Structural Funds and their national and private co-financing -about EUR 52.3 billion in total - contributed to the creation of 700,000 jobs (gross), assisted more than 300,000 small and medium enterprises, and provided significant support for research, technological development, innovation and the promotion of the information society. The average unemployment rate in these regions declined by 2.1% from 11 to 8.9%, which demonstrates that they performed better than regions outside Objective 2.8.15 million people (were trained) in the Objective 1 regions."
It adds: "Market forces alone will not result in balanced economic development across the Union as a whole, and eastern enlargement will double existing regional disparities in the near future." Another EU document says: "The dynamic effects of EU membership, coupled with a vigorous and targeted regional policy, can bring results. The gap between the richest and poorest regions has narrowed over the years. The case of Ireland is particularly heartening. Its GDP, which was 64% of the EU average when it joined 30 years ago, is now one of the highest in the Union." Correctly, the 2002 study also estimated how much of the development impact "leaks" out of the development regions in the form of import of goods, equipment and services from other EU and non-EU countries. It found that "as expected, the leakage effects are higher from the relatively small open economies of Greece, Portugal and Ireland.", with the bulk of the "leakage" being to other EU countries. The "leakages", as a proportion of the Objective 1 interventions, were 46.4% for Greece, 41.9% for Portugal and 37.8% for Ireland. This means that to the extent of these percentages, these countries could not obtain from their own markets the goods, equipment and services occasioned by the injection of EU development funds into their economies. This was a reflection of their relatively low levels of development.
Inspired by the successes it has achieved, the EU is determined to pursue its Regional Policy despite the challenges posed by its enlargement from 15 to 25 countries. In its January 2003 "Second progress report on economic and social cohesion", the EU says: "Once enlargement takes place, disparities are going to widen. The most up-to-date statistics show that 48 regions in the EU15 (representing 18% of the population) had a per capita income below 75% of the average Community. In the EU25, there will be 67 of these regions representing 25% of the population." Nevertheless the report says: "When establishing the future budgetary allocations for economic and social cohesion, the Union will need to take into account the unprecedented scale of economic and social disparities in an enlarged Union highlighted in this progress report, and the intensive, long-term nature of the effort required to reduce them. "As indicated in the first progress report, many contributions to the debate, especially at regional level, regard a figure equivalent to 0.45% of EU GDP as a minimum level for the resources to be allocated to cohesion policy for the period after 2006."
Properly to understand the EU commitment to its Regional Policy, we should contrast the 0.45% of EU GDP mentioned in the preceding paragraph with the equivalent ODA commitments to Africa. The Summary of the 2004 "Global Development Finance" report of the World Bank says: "The European Union, the United States and other donors have announced plans that, if realised, would increase aid to 0.29 percent of industrial countries' national income by 2006 (from 0.23 percent in 2003)." The same report also make the two important points that, "Since 2000, the developing world has been a net exporter of capital to the advanced economies.Half of the net (increase in) official development assistance (in 2002).reflects debt relief donor agencies, rather than increased resources provided directly to developing countries."
We must now state some of the main conclusions drawn from the experience of the implementation of the EU Regional Policy.
- The EU grew out of the West European system of cooperation initiated by the Marshall Plan, informed by the same strategic political and economic objectives that inspired that Plan. In addition to the task to defeat "Soviet expansionism", these included the need to ensure that contradictions among the European powers did not lead to a Third World War.
- It understood the benefits that derived from that Plan especially with regard to the irrationality of depending on loans and/or private investment to advance the underdeveloped regions within the EU to reach their takeoff point.
- It understood that these regions are too poor to generate the savings and capital they need for their development, and that their levels of poverty and underdevelopment made it impossible for them to attract significant volumes of private capital.
- Accordingly, public sector grants constitute the bulk of its development funds.
- Contrary to arguments about minimal state intervention in the economy of the underdeveloped regions, it has proceeded on the basis of the critical need for the state to be involved in the development of these regions.
- This state intervention has entailed detailed "dirigiste" planning and implementation of comprehensive development programmes, fully accepting the concept of a developmental state.
- The Regional Policy is succeeding in its central objective of reducing and eradicating poverty and underdevelopment in the least developed regions within the EU, ensuring that these regions attain the average GDP level of the EU as a whole.
- The 15-member EU aimed to achieve this objective in one generation. It estimates that given its enlargement into 25 countries, it will realise this goal in two generations.
The Marshall Plan enabled the biggest West European economies to attain their takeoff points. They were then able to develop with no need for exceptional external support. They have therefore been able to use the post-Marshall Plan wealth they are able to generate to develop the less developed EU member states. The US and World Bank interventions enabled the Japanese economy to attain its own takeoff point. It was then able to develop with no need for exceptional external support. It has therefore been able to use the post-Western intervention wealth it has generated to sponsor the development of the economies of the South East Asian countries.
The EU also had to respond to the challenge similar to the one that confronted Japan, of developing other countries within its "sphere of influence". Largely, these were its former colonies identified as the ACP countries - the African, Caribbean and Pacific countries. Let us therefore next week examine the ACP-EU "Cotonou Agreement" to see the extent to which the EU has drawn on the successful development model represented by the Marshall Plan and its own Regional Policy to foster the development of the ACP countries.
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