by Cecilia Navarra[1]
The European Union commitment to address poverty in developing countries is in principle twofold. On the one hand, the EU has a development policy whose aims are defined by the European Consensus for Development, framed on the basis of the UN 2030 Agenda for Sustainable Development. On the other hand, the EU is bounded by a commitment stated in the Treaties to the principle of Policy Coherence for Development, which means that every EU policy should take into account development objectives and notably poverty eradication.[2]
In the light of this broad approach, a recent study conducted by the Research Service of the European Parliament[3] explores ways for further EU action in several areas that affect poverty reduction in developing countries, identifying twelve main challenges and a broad range of corresponding policy options at the EU level. The analysis aims at identifying the Cost of Non-Europe, that is the potential net benefit of greater coordination at EU level, or, more precisely, the foregone benefit of not taking further coordinated actions. The concept dates back to the 1980s and it was first applied to the completion of the single market[4], but it has been then applied to several policy areas and the focus has broadened beyond exclusively economic gains.[5] The Cost of Non-Europe in poverty reduction considers the potential of EU action to reduce multidimensional poverty in Least Developed Countries (LDCs)[6].
The study identifies an existing Cost of Non-Europe in three areas:
- Possible actions to deploy more and more effective resources for development aid and climate finance;
- Possible actions to reform trade tools to make them more conducive to reducing poverty;
- Possible actions to promote a fairer global economy architecture.
The three areas are overlapping and policy options may fall in more than one at the same time.
First, the study identifies a number of problems in the mobilization of sufficient funds and in their allocation. They are analysed in three areas: Official Development Assistance (ODA), debt relief and climate finance.
As regards ODA, both the amount of funds is insufficient (the EU has not yet hit its target of 0.7 % of GDP) and the coordination between Member States could be improved, despite the steps already taken.[7] To analyse the potential impact of closing these gaps for poverty eradication in LDCs, a two-stage modelling framework is employed. [8] The analysis finds that ODA from EU Member States has a statistically significant and positive impact on government spending on health and education, and that the latter have a significant and positive impact on the Human Development Index (HDI) of recipient countries. On the basis of the identified relationships, the study constructs a scenario where EU Member States meet their ODA commitments. It finds that this could lead to a cumulative average increase in recipient countries’ HDI of about 4.1 % by 2050. Based on the same approach, the estimated savings due to the reduction in fragmentation of ODA from EU Member States, could lead to an increase in HDI of 1.4 % by 2050.
The same methodology is used to estimate the impact of debt relief measures. Debt servicing is a major constraint on social spending and the recent increase in interest rates is putting a strong pressure on public finances: in November 2023, the International Monetary Fund reported that 16 LDCs were at a high risk of debt distress.[9] This limits fiscal space for much-needed investment in public goods, in structural transformation and in the energy transition. The study estimates the impact of freeing government expenditure via debt relief programs: a moderate scenario just simulating the writing off of the additional debt incurred in 2020 following the COVID-19 pandemic could lead to an average increase in HDI of about 3 % by 2050.
As regards climate funding, the study highlights the insufficient and uncoordinated funding, especially for climate adaptation, resilience and loss & damage. Although the EU is a global bilateral leader in climate finance and in recent years has increased adaptation funding, the available resources from public donors remain short of what is needed. Globally, adaptation financing declined by 15 % in 2021.[10] Adaptation and loss & damage funds are particularly important for LDCs, who are more vulnerable to the adverse impacts of climate change. The study suggests a number of areas in which the EU could raise funds via new taxes and the inclusion of further transportation means in the EU Emission Trading System (EU ETS).
The second policy area where EU action could have an important added value is trade policy and trade implications of other policy actions. A major trade-related bottleneck to poverty reduction is the fact that LDC exports are focused on commodities, raw materials and, more generally, are “stuck” in the low end of global value chains. In 2021, 55.7 % of EU imports from Africa were natural resources and raw agricultural products, and this trend is likely to increase in the light of the search for “critical raw materials” for the energy transition. As a consequence, exporting to the EU does not seem to have increased manufacturing employment in African LDCs, which is considered a proxy for well-paid jobs. Using panel country-level data,[11] the study shows that EU exports are negatively correlated with manufacturing employment in (selected) African LDCs, while the correlation goes in the opposite direction in Asian LDCs.[12]
EU trade policy could introduce some elements to support value addition in LDC exports, such as tying trade measures with technology transfer, or adopting a dynamic approach to trade agreements, committing to increase value added imports over time. Another aspect that could be supported by EU policies is regional integration among LDCs. This is currently low: the share of intra-African trade has stagnated since 2007 at 15 %.[13] The weak complementarity between African national specialisations, linked also to the weight of primary natural resources in their exports, constitutes a first obstacle to regional trade. In turn, low regional integration is an obstacle to value addition: it is more likely that regional trade focuses on processed goods, while raw agricultural products and natural resources are mostly exported outside the African continent. This regional integration could be further supported by the EU, both with trade tools, and with greater coherence of other policy areas with development objectives, for example when it comes to favouring intra-African mobility of people, which in some cases has been hindered by EU migration policies. Greater development-coherent policies could be also developed in the area of green transition, and notably as regards the Carbon Border Adjustment Mechanism, which risks putting further cost burden on LDCs. To address this issue without undermining emission reduction, several possible policy options have been discussed, including policies to support energy transition in the LDCs, via green technology transfer.
Third, the EU could both act directly and by supporting global actions in greater regulation of global markets and businesses in Global Value Chains. A problem that is frequently identified, is the lack of mandatory responsible business conduct standards in Global Value Chains, despite the evidence of potential adverse effects on social, environmental and governance standards of the companies’ search for lower costs abroad. The EU just approved a directive on Corporate Sustainability Due Diligence, that establishes a corporate due diligence duty for large companies to identify, prevent and mitigate negative human rights and environmental impacts in a company's own operations, their subsidiaries and their value chains, which could partly address the issue.
At the multilateral level, the EU could “speak with a single voice” to support further actions in regulating global markets: one relevant example is represented by global food markets. Food prices have seen important volatility and notably important increases in recent years, due to several factors, including conflicts and instability. Among these, there is the high concentration of the global food market, largely dominated by four major companies, whose profits are rising sharply.[14] UNCTAD finds that the majority of LDCs are also net importers of basic commodities, including food, thus commodity price shocks can have an important impact on fiscal space and on poverty.
At the crossroads of business regulation at the global level and of the generation of resources to fill the development finance gap, a final area of action is the global architecture on taxation of multinational enterprises. The debate has been dominated in recent years by the OECD 'Inclusive Framework initiative',[15] which is entering into force. To address some criticisms raised by developing countries, the UN General Assembly adopted a resolution to establish a United Nations Framework Convention on International Tax Cooperation in November 2023. According to estimates that follow the same methodology as the one discussed above for ODA and debt relief, the simple full application of the current agreement could lead to greater resources for developing countries that could translate into an increase in HDI of around 1.7 % by 2050, if the public budget thus saved is channelled to the health and education sectors. Implementing a more ambitious threshold to include more MNEs, would increase the amount of relocated profit by one third, thus having a greater impact on public finances in developing countries.
To conclude, this analysis highlights that the main challenges are inter-related and some transversal conclusions can be drawn. First, being a major economic actor, the EU could contribute to keeping at bay (and reversing) the risk of “race to the bottom” in social, environmental standards and in taxation: the international arena is a context of strategic complementarities,[16] where, in the absence of policy intervention, there are incentives to compete on these standards in the global economy. Second, both direct transfer of resources and design of trade and investment relations should take into account the fiscal space that is needed to promote development objectives. In most of the discussed challenges, there is a “cost of lack of global action”, of which the “cost of non-Europe” is a subset: not all actions depend on the EU alone, but the EU could both act in its own economic relations and as a player in the global multilateral arena.
Notes
[1] Cecilia Navarra is a former Policy Analyst et EPRS. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of the European Parliament
[2] European Commission, International Partnerships
[3] Navarra C., Fernandes M., Heflich A., (2024) Improving EU action to end poverty in developing countries - Cost of non-Europe report, European Parliamentary Research Service. This contribution is based on the results of this study.
[4] The concept of 'non-Europe' was first introduced by the European Parliament in a report by Albert and Ball in 1983 and then used in the 1988 Cecchini report, which supported the plan to complete the single market.
[5] European Added Value Unit, (2023), Mapping the cost of non-Europe report: Theoretical foundations and practical considerations, European Parliamentary Research Service.
[6] UN list of least developed countries. The main indicator used is the Human Development Index.
[7] Notably the Neighbourhood, Development and International Cooperation Instrument-Global Europe (NDICI-Global Europe) and the 'Team Europe' approach.
[8] Navarra C., Fernandes M., Heflich A., (2024), ibid, Annex II.
[9] United Nations Conference on Trade and Development (UNCTAD), The least developed countries in the post-COVID world: Learning from 50 years of experience, 2021
[10] United Nations Environment Programme, Adaptation Gap Report 2023: Underfinanced. Underprepared. Inadequate investment and planning on climate adaptation leaves world exposed.
[11] Data on trade are from the BACI dataset and data on manufacturing employment are from ETD dataset.
[12] This is consistent with the observation that GVC participation encourages structural transformation only when it occurs in a larger context of expansion of manufacturing. Elissa Braunstein, Piergiuseppe Fortunato, Richard Kozul-Wright, Trade and Investment in the Era of Hyperglobalization. The Palgrave Handbook of Development Economics: Critical Reflections on Globalisation and Development, pp. 727-762, 2019.
[13] Cecilia Bellora, Cristina Mitaritonna and Andreas Maurer, Ways forward for EU-Africa trade and investment relations, European Parliament, 2022
[14] UNCTAD, Trade and Development Report, 2023.
[15] About - OECD BEPS
[16] Sanjay Reddy, “International Trade as a Means to Diverse Ends: Development, Workers, the Environment, and Global Public Goods”. In Oliver De Schutter, “Trade in the service of sustainable development: Linking trade to labour rights and environmental standards”, Bloomsbury Publishing, 2017.
