Sailing new waters in the cooperation between the EU and more advanced developing countries

Over the last decades, the world moved from one in which a majority of poor developing countries co-existed with a handful of rich countries, into one in which many developing countries have made significant progress towards their own development.

A number of development challenges remain unsolved even in those countries where progress has been remarkable

The number of people living in extreme poverty fell from 1.7 billion in 1990 to 743 million in 2015, with the largest decreases occurring in the richer developing countries. Living standards as measured by the Human Development Index (HDI) increased in all but a handful of countries over the same period. Although they still receive development assistance, some countries contribute to development efforts beyond their borders through South-South cooperation.

But a number of development challenges remain unsolved even in those countries where progress has been remarkable, for example on technology, productivity, education, environmental sustainability, institutional architecture, economic and societal resilience and sub-national inequalities.

How is the EU responding to these changes?

The European Union (EU) and its member states look at richer developing countries - middle-income and more advanced developing countries (MICs and MADCs) - as allies on global issues. They are also important counterparts for leadership building in their own regions. Possibilities for cooperation include global collective action,as well as mutually beneficial partnerships that increasingly go beyond the classical realm of development cooperation.

Mariella di Ciommo, one of the authors of the study by the European Centre for Development Policy Management (ECDPM) on framing the future EU engagement with more advanced developing countries, explains why the relationship between MICs and MADCs and the European Union is important in view of current and future global dynamics:

It was the World Bank that originally came up with the idea of creating income-based categories and divided countries across the globe into low-income (LICs), lower-middle income (LMICs), upper-middle income(UMICs) and high-income (HICs) countries, based on income per capita figures. Countries can graduate out of their category and join another one if their estimate of per capita income changes. 

Income thresholds are used to track economic progress and to move countries along the various lending windows of the World Bank's institutions as part of a sophisticated process. But they alone are not used to make allocation decisions.

The controversy of using income to justify aid

Other donors have started to use the income-based categories to allocate their aid flows. Some donors have either phased out or cut aid to MICs in order to focus their efforts on poorer countries. European donors have adapted to a political environment in which it has become harder to justify supporting relatively rich developing countries. This is due to a public perception that they already have or can access enough resources and expertise.

The graduation to high-income status also means that countries are no longer eligible for aid, under the Development Assistance Committee rules.

The category does not reflect the diversity of the countries.

Over time, many have criticised the use of the income-based categories as an indicator of development progress. The category, say critics, does not reflect the diversity of the countries nor the complexity of existing development gaps and vulnerabilities at the sub-national level.

The Agenda 2030 brings again to the forefront the challenges that affect middle-income countries such as inequality, the promotion of sustainable production and consumption patterns, combining increased productivity and innovation with social and environmental protection, and a necessary stronger commitment to climate change.

Violent conflict, in the form of war, affects a minority of middle-income countries, but many people experience daily violence to a degree that is unacceptable in modern societies: 33% of all the world’s intentional homicides are in Latin America, which is home to just 8% of the global population.

The principle of leaving no one behind will require support for the most fragile and poorest countries, as well as targeted interventions in middle-income countries as they host over half of the estimated 743 million people who still live in extreme poverty around the world.

Of those residing in middle-income countries, the vast majority live in India (218 million) and Nigeria (86 million). More than a third (172 million) live in MICs that are either fragile, extremely fragile or least developed (LDCs).

Looking at income is not enough.

In reality, middle-income countries are very diverse. Of the 109 MICs, 18 are least developed countries (or LDCs). Twenty-nine are either fragile or extremely fragile, 11 are highly indebted (HIPC) and 26 are small island developing states (SIDS). 

Countries can move across these categories. They can graduate out of a poorer category to join a better one, but the opposite can also happen. This, as it was the case, for example, for Venezuela, Fiji and Senegal.

Projections suggest that the per capita income of middle-income countries will increase, but not necessarily fast enough to catch up with that of richer countries for decades to come, especially in those countries with a rapidly growing population.

Population growth can both stimulate economic growth and reduce per capita income. This is very important for the African continent, where the population is projected to double by 2050 and, with adequate strategies in place, the majority of its countries might turn into MICs.

Economic progress depends not just on income generation in a given year, but also on the wealth available to a given country. This includes human capital and natural resources and the preservation of natural and other assets for sustainable future growth.

Today, middle-income countries overall have a bigger share of global wealth, but concentration in high-income countries is still high. Regions perform very differently on both accumulation patterns and sustainability, with Africa the region most at risk.

Moving from words to action: What does this mean in practice?

To account for this diversity, the EU has introduced the concept of more advanced developing countries (MACDs). This is a fluid concept.

The ambiguity of the label 'more advanced developing countries' can favour political opportunism.

It refers to developing countries that are middle-income and with whom the EU wants to establish more equal development partnerships. It also refers to countries that recently graduated out or aid and with whom the EU needs to refine its frameworks for collaboration.

Tailoring cooperation is another keyword, but this too has different meanings. It can refer to the adaptation of cooperation to the EU interests in different countries, to the adaptation to country contexts and priorities, or simply to the use of a different set of tools that include but go beyond aid.

On the one hand, such concepts are ambiguous so they can be subjected to political opportunism. Ambiguity also risks reducing accountability, especially in the complex world of EU policy. On the other hand, they allow much-needed flexibility in cooperating with developing countries on new ground and to adapt to different realities.

These concepts could also be a contribution to the wider debate on how to better cooperate with MICs and on the development of new measures of progress for sustainable development under Goal 17 of the Agenda 2030 on revitalising the global partnership for sustainable development.

How has the European Union engaged with more advanced developing countries so far?

The EU Consensus on Development and the EU Global Strategy refer to middle-income and more advanced countries, and provide some overarching principles for cooperation. But the European Union does not have a specific policy or guidance for MICs or MADCs.

So far, MICs and MADCs have fallen under different EU policy frameworks and external financing instruments.

As a consequence, and due to the limited synergies across instruments, countries with similar challenges may be treated differently on the basis of the EU’s set up - rather than their needs and potential relevance to the Union.

There are substantial differences in how the various EU instruments allocate resources to MICs according to geographical areas, coverage and to their logic of engagement.

For some upper middle-income countries, the EU has completely phased out bilateral assistance, while regional envelopes and non-aid resources have only partially compensated for the gap created by such decision.

The proposal to streamline the EU external financing architecture in the future EU budget (also known as the Multiannual Financial Framework) after the year 2020 could improve transparency and enhance synergies. But this cannot be the magic wand that will sort the EU and MICs relationship out. 

The bulk of relevant decisions and steps will be taken at the programming and implementation level. At that stage, more specific policy guidance on MADCs would help to streamline decision-making and give more consistency to EU action worldwide. In aggregate, middle-income countries are by far the largest recipients of EU aid. Between 2007 and 2016, MICs received increasing amounts and peaked at €9.9 billion in 2016.

EU institutions allocate larger shares of aid to MICs, compared to other donors: 58% of their bilateral aid - while EU member states allocate an average of 36%, and other global donors allocate an average of 42%. 

In practice, the EU commitment to shift resources away from MICs in favour of countries most in need and fragile contexts has proved difficult. LDCs received less than double the amount than MICs in 2016. 

The EU concentration on some countries in the Neighbourhood is the main reason for the large volumes and increased allocations to MICs.

However, the picture in the Neighbourhood is very varied as some countries receive much larger amounts than others. In 2016, Turkey was by far the largest recipient (€3 billion). The second largest recipient was Morocco, with €628 million, followed by Ukraine (€444 million) and Serbia (€438 million). 

All these countries have consistently been among the top ten recipients of EU institutions aid since 2011, with Turkey as a regular outlier. Other countries in the Neighbourhood, such as Algeria, Azerbaijan and Libya, receive much less aid.

The pattern of MICs outside these regions is much more erratic. For example, India was the 11th biggest recipient (€277 million) in 2016 and the 7th biggest in 2015, but allocations were much lower in the years before then. South Africa was among the ten leading recipients for three years between 2011 and 2016 but was 40th last year with €99 million.

Interestingly, our research has shown that aid allocations to MICs are driven only marginally by their status as least developed countries or by fragility.

Moreover, as you can see below, EU external instruments differ in their distribution across country categories. the European Development Fund disbursed higher shares (75%) to LDCs. The instrument covers African, Caribbean and Pacific (ACP) countries and many LDCs are in Africa. 

By contrast, other larger instruments such as the European Neighbourhood Instrument (ENI) and the Instrument for Pre-Accession Assistance (IPA) concentrate entirely on MICs.

The EU has a multitude of diplomatic, technical and financial tools at its disposal to engage with middle-income countries: political and policy dialogue, policy coherence for development, aid grants, blending, technical assistance and knowledge exchanges, trilateral cooperation and support to South-South cooperation among others.

This is an irreplaceable asset for the EU and it could be used more effectively and with more flexibility. A better use of the toolbox could help to address existing gaps in funding and better mediate between the multiple, sometimes conflicting, objectives that the EU aims to achieve internationally.

But let us take a look at some tools.

Inclusive and open political and policy dialogue can go a long way to foster common agendas, erode barriers to action, and identify actors for future collaboration. Non-governmental actors in civil society, trade unions, the media, academia and businesses can be valuable allies.

The EU already has a good record of policy dialogue in line with the development effectiveness principles of ownership and inclusive partnerships, although worsening conditions in a particular partner country affect the EU's political leverage and the partner country's commitment. This has been the case in the neighbourhood.

Aid grants have a quite small role to play in the most advanced middle-income countries. But well targeted, strategically used resources remain a highly relevant form of support.

EU thematic programmes and instruments in support of civil society and other non-governmental actors are very valuable and could support politically-informed, tailored approaches and reaching out to potential allies beyond the classical suspects of the development sphere.

Loans, guarantees and equity investments can be of real value in strategic sectors and to support private sector development, for example, to finance innovative enterprises or sectors with high employment creation potential. The combination of EU blending, sectoral support and dialogue is a powerful tool for reforms as the cases of Morocco, Egypt and Colombia show.

The risk to have little bang for the buck with aid in terms of development results or even harmful effect on national systems when blending mechanisms are used is high. International contexts where rules are not shared provide incentives for a race to the bottom in cooperation standards, potentially through a resurgence of tied aid.

Rather than go with the tide, the EU could develop an alternative proposition. A global European External Investment Plan (EIP) could increase the effectiveness and the impact of all existing regional facilities. The combination of a financial pillar, technical assistance and action to improve the investment climate through political and policy dialogue is a much-welcomed innovation in the direction of a more coherent approach. 

However, further thought needs to go into how to work with development finance institutions beyond Europe with the objective to develop local functioning markets and small-medium size enterprises (SME). which today receive a very small share of EU blending.

Twinning and TAIEX (Technical Assistance and Information Exchange) are mechanisms that promote peer-to-peer exchanged between national administrations between European countries and partners in the Neighbourhood and in Enlargement candidates. They build on two major drivers for interest in the EU from partner countries: EU public sector expertise and the EU access to a network of member-states personnel.

Their targeting mainly public administrations with the objective to develop capacities and share best practices is very much in line with the requirement to build stronger and more trusted institutions in partner countries. Some experiences of such nature exist, for example in cooperation with Latin America that could build a wealth of lessons on which to build for adapting these mechanisms elsewhere or scale up their use.

SDG 17 on global partnerships for sustainable development identifies South-South Cooperation as a complementary mean of implementation for the 2030 Agenda. The EU could explore opportunities on how to work alongside Southern providers more systematically in support of South-South Cooperation or through trilateral cooperation. in the spirit of complementary and respect for different approaches. 

Opportunities for actual cooperation beyond the nice words of framework agreements have been limited for both technical and political reasons. But the forms and actors of South-South cooperation are many, and the EU could further adapt its systems to facilitate such collaboration.

Please click here to access the study.

If you wish to get in touch with the author of the study, please contact Mariella Di Ciommo.

For inquiries related to communications or to this shorthand, please contact Valeria Pintus.

In addition to structural support by ECDPM's institutional partners: The Netherlands, Belgium, Estonia, Finland, Ireland, Luxembourg, Sweden, Switzerland, Denmark and Austria, this publication also benefits from funding by UK aid from the Department for International Development (DFID), United Kingdom.

Notes and references

 Figure 1. Data is for 2013; the extreme poverty threshold is PPP$1.9 a day (International dollars at purchasing power parity). Source: authors' calculations based on Development Initiatives' Development Data Hub data/Povcalnet. 

Figure 2. Source: authors' calculations based on World Bank data. 

Figure 3. Source: gross disbursements; based on DAC country categories. Notes: authors’ calculations based on OECD DAC CRS data, extracted on 12 March 2018. The UMIC category includes states of the former Yugoslavia. 'Other’ includes regional and ‘unspecified’ funding. 

Figure 4. Source: gross disbursements; based on DAC country categories. Notes: authors’ calculations based on OECD DAC CRS data extracted on 12 March 2018. The UMIC category includes states of the former Yugoslavia. ‘Other’ includes regional aid and unspecified developing countries. 

Figure 5. Source: gross disbursements; based on DAC country categories. Notes: authors calculations based on OECD CRS DAC data extracted on 12 March 2018. The UMIC category includes states of the former Yugoslavia. Regional aid is proportionally attributed to each region. ‘Other’ includes ‘Developing countries, unspecified’ funding. EU is Europe, SSA is Sub-Saharan Africa, MENA is Middle East and North Africa; Asia is Far East Asia and South and Central Asia; AME includes North and Central America, and South America; OCE is Oceania. Regions are according the OECD DAC distribution (see Annex 2 of ECDPM’s discussion paper). 

Figure 6. Source: authors’ calculation based on DEVCO Annual Reports (2011 to 2016). ‘Others’ include the INSC, Food Facility and non-specified instruments. 

Map 1. Note: The map also includes MICs that are non-ODA recipients. MIC country classification is based on the World Bank country income historical classification of 2016 (last historical classification available). LDC category classification is based on the UN Committee for Development Policy LDC list of 2016. Fragile and Extremely Fragile classification is based on the OECD States of Fragility Report of 2016. Chile, Seychelles and Uruguay were UMICs in the DAC list of 2016 which graduated in 2018. 

Map 2. Note: ODA gross disbursements, euro million, constant 2015 prices. Source: OECD DAC Credit Report System.

Note: the content of this social shorthand is entirely based on ECDPM’s research. All references and further bibliography can be found in this discussion paper.