Eu Development Policy: The Case Of Debt Relief

EU DEVELOPMENT POLICY THE CASE OF DEBT RELIEF

Supervisor:

F. Arab

N. Kwanjai

K. Diakidis T. Krume C. Tonne Pigeonhole 501 Date: May 28, 2009 2E Making a European Market Version: Final Draft Words: 4953

Outline Abbreviations……………………………………………………………………...x 1. Introduction……………………………………………………………………1 2. History of the EU Development Policy………………………………………..1 3. Debt Relief under the HIPC Initiative…………………………………………3 4. Economics Behind EU Development Policy…………………………………..4 5. Case Study: HIPC in Ghana…………………………………………………...9 6. Debt Relief - Shortcomings and Recommendations……………..…………..12 7. Conclusion……………………………………………………………………13 8. References……………………………………………………………………15

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

1

Abbreviations ACP

African, Caribbean and Pacific countries

CA

Cotonou Agreement

CAP

Common Agricultural Policy

EDF

European Development Fund

HIPC

Heavily-Indebted Poor Countries Initiative

IMF

International Monetary Fund

MDGs

Millennium Development Goals

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

2

1. Introduction The European Union regards development as a crucial component in its external actions. In order to eradicate poverty, which is its main objective, EU development policy in a broader context is framed in accordance with the United Nation‟s Millennium Development Goals (MDGs) of 2000 (EC, 2009a). As most of the EU‟s member states used to possess former colonies in the African, Caribbean and Pacific (ACP) area, its foreign aid and development measures are primarily aimed at assisting economic trade and development of those countries situated there. Taken policy measures are based on the currently valid „Cotonou Agreement‟, established in 2000. Alongside this, the EU follows specific programs, such as the „Heavily-Indebted Poor Countries‟ (HIPC) Initiative, which aims to diminish the external debt of the world‟s most indebted and economically underdeveloped countries to sustainable levels (EC, 2009b). Nevertheless, scholarly circles repeatedly argue that debt relief does support short-term economic development but evokes financial dependence in the long run. In the light of these developments, this paper aims to answer the following question: To what extent does the EU‟s debt relief policy enhance economic growth and development in developing countries? This is asked in order to obtain a clearer picture of development policy, particularly EU development policy. To answer this question, this essay will cover both theoretical concepts of development policy and debt relief, as well as an application of these to a concrete case study. First, it tackles the general evolution of EU Development Policy and debt relief in particular. Second, debt relief is analyzed from an economic point of view. Subsequently, the case study on Ghana, a country that has received debt relief, is entailed in order to widen the essay‟s analysis from a purely theoretical scope to a more reliable practical insight. Finally, this paper evaluates potential disadvantages of debt relief measures and gives recommendations for future policy actions.

2. History of the EU Development Policy The EU‟s development policy can be traced back to the Schuman Declaration of 1950, in which the topic of development assistance to Africa was emphasized as an

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

3

essential objective of the former European Community (EC). The subsequent Treaty of Rome formally introduced development aid into the EC‟s framework and constituted the basis for the creation of the European Development Fund (EDF), which since then is responsible for coordinating and allocating financial development assistance (Smith in Cini, 2007, p. 299). The first legal basis for trade cooperation between the EC and African countries was created by the 1963 Yaoundé Convention in Cameroon and the following second Convention in 1969 after the former‟s expiration (EC, 2008). The main emphasis of these Conventions was the cooperation with Sub-Sahara African states. More precisely, the Yaoundé Conventions confirmed to respect the national sovereignty of all participants, thus promoting a partnership of equals (Smith in Cini, 2007, pp. 229-230). In the following decades, the EC continuously increased its developmental policy, both with regards to geographical and strategic enlargement. This resulted in the Lomé Convention of 1974, which – on a geographical level extended the EC development assistance from African to also Caribbean and Pacific (ACP) countries. One of the reasons for this geographical expansion was the accession of the UK (EC, 2009). Because of the UK‟s colonial history in both the Caribbean, as well as the Pacific area, EC (or later EEC) developmental aid strategies had to be widened to countries in these two regions. In structural matters, the following Lomé Conventions mainly focused on trade and political aspects. In addition, it defined three guiding principles, namely, 1) the abolishment of non-reciprocal trade preferences for the majority of exports from ACP countries to the EEC; 2) the recognition of equality between partners, sovereignty, “mutual interests and interdependence”; 3) the freedom of every state to possess and make its own policies, in the framework of the Conventions (EC, 2009). Particularly non-reciprocal trade preferences were regarded as crucial cause for failed development aid within economic cooperation (ibid.). In 2000, the European Union tried to compensate major shortcomings of the previous agreements through adopting the Cotonou Agreement (CA) which widened the scope of EU Development Policy to the promotion of human rights, democratic principles and the rule of law. This implies a degree of conditionality as countries risk a repossession of the funds allocated to it by the EU (CA, 2005). As the CA is being revised every five years, the latest change of 2005 introduced the principle of conditionally (EC, 2009). It involves a new sanction instrument with which Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

4

development aid can be suspended in cases of breaching the CA‟s conditions. Thus, the CA profoundly amended the EU-ACP developmental partnership and constitutes its current framework of EU external action in this area (Santiso, 2002, p. 16). In a nutshell, it becomes clear that EU development policy is cross cutting as economic assistance is linked to issues of human rights and good governance. Consequently, to the EU, financial assistance is dependent on both above mentioned areas in order to be able to achieve long-term sustainability within the respective developing country (EC, 2009). As the EU development policy aims to achieve the MDGs, including poverty reduction, debt relief can be regarded as one instrument to accomplish these goals faster. Therefore, the following section will examine debt relief and the initiative as such as well the EU‟s role in it.

3. Debt Relief under the HIPC Initiative Worldwide, countries are confronted with enormous debt burdens towards various multilateral and bilateral institutions that they cannot manage. It additionally hinders their economic growth as well as their fight against poverty. Launched in 1996 and enhanced in 1999, the World Bank and International Monetary Fund (IMF) established the Heavily-Indebted Poor Countries (HIPC) Initiative, which is “a comprehensive approach to debt reduction” (IMF, 2009). It stems from the Lyon G8 summit in France in 1996, where the G8 decided to strengthen joint efforts in the field of development policy (G8 Information Centre, 1996). By the end of 2007, $51 billion as debt reduction packages in total were given to eligible countries (IMF, 2009). Thus the aim of the HIPC initiative is to lower the external debt burden of the “poorest and most indebted countries” to “sustainable levels” (EC, 2009c). The initiative includes multilateral and bilateral public creditors as well as commercial creditors (ibid.). The EU has financially supported the program since its beginning in 1996, and acts as “creditor as well as donor” (ibid.). As a donor, the EU assists through the HIPC Trust Fund, run by the World Bank with special focus on the ACP countries (EC, 2002). In total, €1.6 billion have been given so far, with €934million to the Trust Fund and €680 million given beyond HIPC. EU debt relief to the Trust Fund is financed by the EDF (EC, 2009c). Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

5

Currently, 41 countries are entitled for the HIPC, most of them situated in Sub-Saharan Africa. There are three groups of countries within the HIPC program. 24 countries, among them Ghana, have reached the completion point, thus been given irrevocable debt relief from the IMF and additional creditors. Eleven countries have attained the decision point, with several of them already obtaining interim HIPC Initiative debt relief. Six countries are classified as eligible but have not yet reached the decision point (IMF, 2009). It furthermore needs to be noted that debt relief is only granted by the IMF Executive board and the International Development Association (IDA) under certain conditions. A country eligible for debt relief has to prove a “track record of reform and sound policies through IMF and the IDA– supported programs” (ibid.); it also has to develop a Poverty Reduction Strategy Paper (PRSP). Thus, countries being given debt relief support are partly being guided through the process. This section gave a brief overview of the HIPC initiative as well as the EU‟s role in it. The basis is now set to turn to the economics behind EU development policy on a broader scale in the following section.

4. Economics Behind EU Development Policy In order to investigate the impact of debt relief for both the giver and the donor, in this case the ACP countries and the European Union, it is crucial to define economic development. Economic growth and development are often confused, because some people use them as synonymous. But they have distinct differences. Whereas growth is quantitative and "refers to the increase in an economy's real gross domestic product (GDP) and income over time" (Ezeala-Harrison, 1996, p. 3), economic development is much more qualitative in nature. It “involves the process through which a country or region achieves economic growth in addition to structural transformation of its economy” (Ezeala-Harrison, 1996, p. 10). Accordingly, development policies are aimed not only to improve economic growth, but also to covers humanitarian aspects, such as to prevent crises. EU development policy is very controversial, because of the lack of effectiveness. Although the CA for instance, set out debt relief for HIPC countries, it is insufficient from an economics perspective. The ACP countries are highly dependent on capital accumulation, because sustainable economic growth in these Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

6

countries can only be fostered by investments and savings. Therefore, this chapter demonstrates EU‟s development policy from an economic point of view. Is EU development aid effective? Table 1 – The vicious circle of poverty1

In order to create new trade-partnership agreements with developing countries, stability and growth are essential. Ragnar Nurkse, an Estonian-descended economist, argued for the existence of the so-called vicious circle of poverty. In Table 1 one can see that, according to him, “the most important circular relationships of this kind are those that afflict the problem of capital formation in economically underdeveloped countries.” The main problem of economic development is accordingly “a problem of capital accumulation”. (Nurkse, 1952, pp. 1-3). The vicious circle of poverty demonstrates his concept, because low income leads to low savings, which lowers the investments. Because of low investments, there is less productivity, which will decrease the income, which then leads to low consumption. Thus, in order to overcome this vicious circle of poverty, “the lowincome economies require progress on a broad front, with simultaneous expansion of 1

Source: reproduced from The World Bank (2009). Poverty. Retrieved May 5, 2009, from: http://www.worldbank.org/depweb/beyond/beyondbw/begbw_06.pdf Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

7

industries that support each other and increase the chances of success” (Grant & Brue, 2007, p. 482). As a result, EU development policy is aimed to break countries out of this circle. Several instruments are, according to Nurkse, helpful to break them out of the circle. Firstly, better educational systems increase incomes. Secondly, technological capabilities improve productivity. Thirdly, direct foreign investments increase the amount of capital accumulation and finally, financial deepening increases savings. The main problem, however, is the lack of capital, which is fostered by instability within the regions. Debt Relief is one instrument of the EU, in terms of development aid, which should enhance capital accumulation. Chenery and Strout (1964) came up with the Dual-Gap Model in macroeconomics, which presents an analysis of low growth concerning savings as well as foreign exchange limitations. It is based on the Harrod-Domar growth model and basically claims that investments, public expenditures and exports must equalize savings, taxes and imports, if a country wants to achieve balanced growth. So, that means two things for underdeveloped countries. Because they have low incomes, they do not have marginal propensity to save. Accordingly, because S=I, there is too little investment to achieve the target growth rate. This is very similar to Nurkse‟s circle of poverty. Moreover, a negative trade balance decreases the GDP, which will lessen Y (GDP). Because Y is equal to C+G+I+X-M, a second gap is established. This is called the Dual Gap. In order to fill in these gaps, foreign investments are needed, so that the savings ration goes up. In addition, foreign aid which can be regard as investment will also close this gap. The Harrod-Domar formula (g=s/c  s=I) provides insight in the amount of investments needed to outbalance the gap. Thus, the amount of investment is marginal, because it demonstrates how much to invest, so that Y (GDP) increases. Thus, the marginal propensity to save has to be increased, so that the savings ratio and investments rise. As a result, foreign investments are needed, because otherwise underdeveloped countries will suffer from their current account (trade deficit), because it will hinder sustainable growth. Khan emphasized the need for aid, because he argues that “within the dual gap formulation, it is also usually the case that aid is more productive when the foreign exchange constraint rather than the savings gap is binding” (Khan, 1998).

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

8

Table 2 – Dual Gap Analysis I+G+X=Y=S+T+M

I = Investment

(I + S) + (G – T) = (M – X)

G = Public Expenditure X = Exports

(I+S) = Investments + Savings

S = Savings

(G – T) = Budget deficit

T = Taxes

(M – X) = Trade imbalance

M = Imports

The dual-gap analysis is a static model in how to calculate growth. However, it reveals limitations. Turnovsky (2005) argues that “one of the main purposes of directing the foreign aid to public investment is to stimulate private investment and capital accumulation, which is inherently a dynamic process. This suggests that the role of foreign aid in the development process can be studied satisfactorily only by embedding it in a carefully articulated dynamic framework” (ibid.). As a result, for the receiver, foreign aid is essential to break out of the circle of poverty and to close their gaps. It does not matter whether they receive aid from bilateral, multilateral or commercial sources, as long as they are able to foster sustainable development. The giver, however, has a different perspective on development aid. For the giving countries efficiency and the success of aid is crucial, because development aid is very controversial among EU member states So, the question arises in how far aid, debt relief specifically, is an effective instrument to promote growth & sustainable development and reduce poverty? According to the implications of the dual-gap analysis and the vicious circle of poverty, the gain in overall welfare should be vast. However, the reality shows that foreign aid is ineffective. Alesina and Dollar (2005) highlight the fact that development policies have no significant influence on the recipient‟s macroeconomic policies and their growth (ibid.). Furthermore, G.W. Gunning argues also for wasted aid, meaning that if a country does not have admittance to capital markets, it is often for reasons, which would make aid ineffective. Thus, aid can be often insufficient. Nonetheless, he also mentions “aid can be effective after shocks” (2005, p. 22). Thus, although aid is effective under certain circumstances, it is often wasted. One reason for the ineffectiveness of aid is “the poor performance of the bureaucracies of the receiving countries“(Alesina & Dollar, 2000, p. 55). In addition, Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

9

Alisina & Dollar argue that the receiver does not get aid because of characteristics of maintaining democratic and/or open values, but rather on a colonial basis. These characteristics are essential for sustainable growth, because stability and good governance is needed (Epstein, Gent, 2009). Alesina & Dollar (2005) claim that the pattern of flows of foreign aid is inadequate. They argue that “the allocation of bilateral aid across recipient countries provides evidence as to why it is not more effective in promoting growth and poverty reduction” (p. 55). Table 3 – Foreign Aid & Development Distribution2

Table 3 demonstrates clearly that the reasons for distributing foreign aid are rather colonial ties instead of the necessity of stability through democratic values. But because stability is an important factor for foreign investments and capital accumulation, new firms will not enter the market or make investments in that country. As a result, development policies are not efficient, because of bad judgments, bad infrastructure and misallocation of savings (see Alesina & Dollar, Gunning). They still have positive effects on growth and sustainable development in stable countries with good governance (see Epstein & Gent, 2009). To conclude, the receiver benefits from foreign aid in terms of foreign investment and savings, as well as, decreasing poverty. Receiving countries cannot have sustainable growth without foreign aid. Therefore, it is needed to increase the 2

Source: reproduced from Alesina & Dollar (2000) p. 42.

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

10

total welfare of the underdeveloped country. But because of instability and incorrect allocation of policies, it is ineffective. So if aid should work as a solution to market imperfections, development policies have to be more conditional, fungible and implemented in stable and open countries. As a result, the CA introduced the principle of conditionality, demonstrating that the EU is aware of the fact that false allocation of resources does not help countries out of poverty. The following section now turns at a concrete case study to analyze EU development policy regarding Ghana in general and the HIPC initiative in particular.

5. Case Study: HIPC in Ghana After having covered both theoretical concepts of development policy and debt relief, it is now appropriate to turn to a real world example in order to realistically illustrate the outlined concepts. In order to do so successfully this section provides a case study on Ghana. This case study mainly pursues the goal of establishing whether the EU‟s debt relief policy has really helped Ghana enhance economic growth and development or not. Evidence for this case shall be brought forward in terms of concrete facts and figures as well as a broad socioeconomic analysis, serving to provide a general overview. Economic analysis quickly reveals what a high economic potential Ghana possesses. Despite this fact, Ghana‟s unfavourable economic structure has remained the same for decades. Up until 1983 barely any successful efforts were made to move away from the sole exportation of primary products such as cocoa, bauxite, timber as well as gold (European Commission, 2006). As it is generally known, high dependency on primary, mostly unprocessed, products may be very harmful to the economy as the terms of trade are constantly worsening for unprocessed raw/primary products. However, since 1983 Ghana has been devoted to change this situation by means of committing to strict economic reform projects. With the support of international donors Ghana has been able to curb economic growth between 1991 and 2002 by 4.2 percent per annum (European Commission, 2006). As part of Ghana‟s initiative to revive economic growth in 2002 it applied for the HIPC programme. The main thought behind doing so was to free itself from the enormous fiscal burden which accumulated together with external foreign debt.

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

11

Accumulating interest rates and only minimal effective government revenue made it almost impossible for Ghana to invest in education, infrastructure and health care (IMF, 2005). Before reaching the HIPC completion point in 2004, Ghana went through massive restructuring of its administration, practices and more. The debt relief has been steadily provided ever since 2004 and will continue to be provided for decades to come. Present calculations for 2004-2011 show that as part of the HIPC programme approximately $215 million USD of debt will be relieved each year (European Commission, 2006). In order for Ghana to reach the HIPC completion point it had to overcome many obstacles, including poverty reduction, macroeconomic performance and public expenditure management. All of which have been, according to Mrs. Alphecca Muttardy, the IMF Resident Representative in Ghana, “overall satisfactory” (IMF, 2005). Furthermore, she states that “In particular, Ghana has enjoyed relatively strong economic growth with significant reduction in the rate of inflation in the past three years.” In general Ghana has managed to construct and keep a sufficiently good record with regards to implementing Ghana Poverty Reduction Strategy (GPRS), while at the same time improving its public expenditure management system. This entire process of setting conditions, observing and assessing has made sure that Ghana will be able to act under the right measures when receiving debt relief through the Multilateral Debt Relief Initiative (IMF, 2005). Ghana has established a strict plan outlining what will be done with the funds made available though the aforementioned initiative. Up high on its priority list is the investment in health programmes, education as well as improving infrastructure in rural areas (BBC News, 2002). However, as with almost any plan envisaged on paper, there are problems in real life and variables unaccounted for, which in turn inevitably results in losers. First and foremost the trading agreements from all sides want (in the long-run) one thing from Ghana (and other ACP countries): their removal of trade barriers. This removal of trade barriers has proven to be an obstacle to the fight against poverty. Oftentimes trade barriers are not removed on both sides, meaning: Ghana complies but the EU keeps up barriers to trade and occasionally practices dumping, thereby completely destroying local markets. Adjei Henaku, the Executive Secretary of the Ghana Farmers‟ Association, put it like this: “It is extremely difficult to figure out how the dumping of cheap poultry parts-like legs, wings, necks - that have no markets in the EU anyway, could be permitted in the name of free trade that is supposed to Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

12

promote competitiveness” (GAWU, 2004, p. 6). Another example is provided by the EU‟s export restriction on Ghanaian cocoa using the chocolate directive. Considering that cocoa is Ghana‟s main export product to the EU, the restriction is quite devastating. Furthermore, bananas are prone to extremely strict regulations on size, weight, colour and shape. Due to this barrier banana exports from Ghana to the EU are severely restricted. Making matters worse is the fact that the banana farms in Ghana employ a large part of the poorer segment of the population, which means that the poor will become even poorer – which in turn further worsens the already less than optimal Gini coefficient (GAWU, 2004, p. 5). With regards to shortcomings and recommendations, it should be mentioned that one sided removal of Ghanaian trade barriers will in the long-run only benefit the European Union, which upholds its trade barriers and engages in the dumping of goods in such markets. It is generally known that dumping destroys local markets by means of providing certain agricultural products below the price of local farmers. This way local farmers as well as business are forced out of business due to the fact that they are unable to compete at such low prices. The main source of dumping has been identified to be the Common Agricultural Policy (CAP) which the European Union has been upholding for decades. Thus, while the EU is on one hand trying its best to eradicate poverty by means of trade and aid, it is on the other hand an obstacle to itself due to policies such as the CAP. As a recommendation the trade barriers should be mutually removed and trade shall flow in both directions rather than being one-sided. This is the only way for Ghana to start being competitive on an international level. If the massive dumping in Ghana comes to an end, farmers will be able to make an economic profit, which in return enables them to further invest into land and machinery as well as labour. As consequence Ghanaian farmers become more efficient and competitive on an international scale, further increasing profits. As mentioned previously, in order to escape the poverty cycle the accumulation of saving is crucial, as savings are positively related to investment. In other words, an increase in savings will increase investment due to the fact that there is spare currency now, not needed for life sustaining purchases such as food. On a larger scale, investment then benefits locals by means of the multiplier and accelerator effect. Closely related to this topic is the Dual Gap Analysis, which basically states that low income gives rise to a lower propensity to save. Hence, a lack of saving will result in a lack of investment, which Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

13

would have been urgently needed to achieve the target growth rate and development. Investment curbs employment, increases the GDP and improves amongst many other things the local infrastructure. Thus having applied the theoretical framework to the actual situation, the outcome in Ghana reveals there is still room for improvement. However, it is not constructive to shut such otherwise well-intended initiatives off, it is rather important to base future efforts on previous experience and learn from mistakes. The following section will come back to the bigger picture of EU development aid, outlining certain shortcomings and recommendations based on the findings of this paper.

6. Debt Relief - Shortcomings and Recommendations Having illustrated the EU‟s development policy and especially debt relief measures in ACP countries a critical assessment of their effectiveness remains to be given. On the basis of the illustrated economic theory behind debt relief measures, several shortcomings become visible. As has been illustrated in a previous section debt relief measures are highly controversial regarding the dependency between receiver and donor states as regards to economic growth. As previously stated, the European Union‟s foreign policy tries to drag underdeveloped countries out of the vicious circle of poverty. Hence, it attempts to increase the amount of capital within these countries in order increase income, savings, investments and finally consumption. So why do the Unions development measures and debt relief in particular often remain unsuccessful? One major reason is the EU‟s exclusive focus on economic growth. As previously illustrated foreign aid often creates colonial-like ties between the donorand receiver states and therewith makes the latter highly dependent on foreign investments and resultant capital accumulation. As a result, a dependency in the form of colonial ties between the donor and receiver states is created. Allesina and Dollar argue that these colonial-like ties lead to an insufficient promotion of democratic values and their institutionalization in the receiving countries (Allesina&Dollar, 2005). Often these countries governments mal-invest the given capital into measures that do not enhance economic growth. Hence, the vicious circle of poverty cannot be

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

14

overcome and foreign aid becomes ineffective, being „wasted aid‟ (Gunning, 2005, p. 22). In order to decrease the dependency between the donor and receiver states, the EU should increase the focus on good governance and stability in the aid-receiving countries. Sustainable and independent growth can at best be achieved through foreign investors allocation their forms in these countries. In case foreign investors feel their investments to be threatened by political instability, they will retract their investments

and

reallocate

respective

firms

into

a

saver

environment

(Alesina&Dollar, 2005). As a result, development policy should focus more on promoting political stability within underdeveloped countries. With this critical reflection in mind, the paper now turns to its concluding section evaluating the analyzed in its entirety.

7. Conclusion The paper set out to answer the following question: To what extent does the EU‟s debt relief policy enhance economic growth and development in developing countries? To answer this question the paper looked at both theoretical concepts of development policy and debt relief as well as at a concrete case study of Ghana. As has been shown, the EU development policy intends to help developing countries to break out of the vicious circle of poverty, through multiple measures including debt relief. Yet, what has become visible is that EU development policy is often ineffective as it does not seem to have a significant positive effect on the recipient‟s macroeconomic policy and growth. For one, this seems to be due to an incorrect allocation of resources, such as through insufficient bureaucratic institutions in the receiving countries. For two, it has been argued that EU often directs its development aid rather to countries with colonial ties and thereby often disregards political stability, such as democracy and human rights compliance. In the case of Ghana it was shown that while Ghana has indeed enjoyed an upheaval of economic growth in the framework of the HIPC initiative, EU development policy action towards Ghana remains largely controversial. While supporting the HIPC in Ghana, trade barriers for Ghanaian imports into the EU remain thereby dramatically weaken Ghana‟s export ability. In addition, EU dumping Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

15

practices do not enhance economic growth but rather destroy it as local farmer cannot compete with these low prices. This stands in direct conflict to the aim of the HIPC Initiative, which tries to help countries to break out of the vicious circle of poverty. EU development policy is thus very ambiguous, trying to heal in one part, while at the same time seriously injuring another. In how far the EU fosters economic growth and development, through measures such as debt relief, can thus not per se be stated. Yet the great ambiguity of EU development policy towards developing countries in general certainly becomes visible. There are certain limitations that need to be stated. Due to the limited scope of the paper, it could only outline certain aspects of EU development policy and action and could also only touch upon certain theoretical outlooks on the topic. Thus, the paper could by no means achieve a holistic picture of EU development policy. Second, the analyzed data might have had certain limitations during its conduction, thereby distorting the outcome. Furthermore, the paper had to rely on reports as well as secondary sources, as a first-hand investigation was not possible due to a limited availability of resources and time. Also, due to the limited scope of the paper, it could not touch upon the interrelatedness between economic fields and others such as the political and social areas. Further country-specific research is needed here. The economic perspective on development aid is crucial. Yet, it is only one part of the bigger picture. Political, cultural and social perspectives certainly also play an influential role regarding the welfare situation of a specific country. Thus, a holistic approach to the improvement of the welfare situation of an economically troubled country is needed. More so, the cooperation between the country aiding and the country aided needs to be based on principles of respect, equality and mutually benevolent attitudes on all levels. It must be ambiguous-free.

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

16

8. References Alesina, A., & Dollar, D (2000). Who Gives Foreign Aid to Whom and Why? Journal of Economic Growth, 5, 33–63. BBC News. (2002). Ghana gets debt relief. Retrieved May 13, 2009, from BBC News: http://news.bbc.co.uk/2/hi/business/1843958.stm Chenery, H. & Strout, A. (1966). Foreign Assistance and Economic Development. American Economic Review, 56 (4), 679-733. Cini, M. (2007). European Union Politics. Oxford: Oxford University Press. Cotonou Agreement (CA) (2005). Partnership Agreement between the Members of the African, Caribbean and Pacific Group of States of the one Part, and the European Community and its Member States of the other Part. Retrieved May 5, 2009, from http://ec.europa.eu/development/icenter/repository/agr01_en.pdf Epstein, G. & Gang, I. (2009). Good governance and good aid allocation. Journal of Development Economics, 89, 12–18. European Commission (EC) (2002). EU debt relief initiative for HIPC. Retrieved May 13, 2009, from http://www.europa-eu-un.org/articles/fr/article_1619_fr.htm European Commission (EC) (2006). European Commission. Retrieved May 13, 2009, from Delegation of the European Commission in Ghana: http://delgha.ec.europa.eu/en/eu_and_ghana/overview.htm European Commission (EC) (2008). European Union Foreign Aid and Development. Geographical Context. Retrieved May 5, 2009, from http://ec.europa.eu/development/geographical/cotonouintro_en.cfm European Commission (EC) (2009a). Development Policies. Retrieved May 13, 2009, from http://ec.europa.eu/development/policiesgen_en.cfm European Commission (EC) (2009b). European Union Foreign Aid and Development. General. Retrieved 05-03-2009 from: http://ec.europa.eu/development/aboutgen_en.cfm European Commission (EC) (2009c). Debt Relief. Retrieved May 13, 2009, from http://ec.europa.eu/development/policies/initiatives/hipc_en.cfm Ezeala-Harrison, F. (1996). Economic Development: Theory and Policy Applications. Praeger: Westport, CT. GAWU, D. C. (2004). New ACP-EU Trade Arrangements: New Barriers to Eradicating Poverty? Brussels: Eurostep. Grant, R. & Brue, S. (2007). The History of Economic Thought (7th Edition). Thomson: SouthWestern. Gunning J.W. Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

17

(2005). Why Give Aid? Free University Amsterdam. Paper presented at 2nd AFD-EUDN Conference on Development Aid: Why and How? Paris, November 25, pp.1-26. G8 Information Centre (1996). Lyon Summit Documents. A New Partnership for Development. Retrieved May 13, 2009, from http://www.g8.utoronto.ca/summit/1996lyon/partner.html Highly Indebted Country (2009). Map. Source: World Bank, Retrieved May 15, 2009 from BBC Website: http://newsimg.bbc.co.uk/media/images/40624000/gif/_40624740_debt2_map 416.gif International Monetary Fund (IMF) (2005). Ghana and the IMF. Retrieved May 13, 2009, from IMF Website: http://www.imf.org/external/np/sec/pr/2005/pr05293.htm International Monetary Fund (IMF) (2009). Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative. Retrieved May 13, 2008, from http://www.imf.org/external/np/exr/facts/hipc.htm Khan, H. (1998). Aid and Development: What Can Africa Learn from the Macroeconomics of Foreign Aid in Some Southeast Asian Economies? Retrieved May 13th 2009 from: http://www.unu.edu/HQ/academic/Pg_area4/Khan2.html Nurkse, R. (1952) Some Aspects of Capital Accumulation in Underdeveloped Countries. Ciaro: National Bank of Egypt. Santiso, C. (2002). Reforming the European Union Development Cooperation: Good Governance, Political Conditionality and the Convention of Cotonou. Retrieved November 27, 2008, from http://www.american.edu/aces/Working%20Papers/2002.4.pdf Thirlwall, A. (2002). The Mobilisation of Savings for Growth and Development in Developing Countries. The Icfai University Journal of Applied Economics., 1, 7-30. Turnovsky, S. (2005). The Composition of Foreign Aid: Consequences for Economic Growth and Welfare. Journal of International Affairs, 58 (2), 129ff. World Bank (2009). Poverty. Retrieved May 5, 2009, from: http://www.worldbank.org/depweb/beyond/beyondbw/begbw_06.pdf

Maastricht University, European Studies Program, BA 2.E Making a European Market 2008-2009 Group 9 Team A

18