The differentiation debate: Does the EU have responsibility for helping to tackle poverty and inequality in middle-income countries?

3 Oct

Written by Svea Koch and Siân Herbert

The need for greater differentiation between partner countries and the extent to which middle-income countries (MICs) should continue to receive EU aid have become contentious issues in the EU’s ongoing process of modernising EU development policy. While there is wide acknowledgement that a changing development landscape requires donor agencies to better adapt their approaches to the varying levels of development of partner countries (‘differentiation‘), there seems to be less agreement on the nature of these changes and how exactly the EU should respond to them.

The first controversy refers to the changing geography of poverty: Has poverty really turned from an international to a national distribution problem in MICs as claimed by a recent study on the ‘new bottom billion’? Is poverty in MICs transitory or are we likely to see the majority of poor people in MICs in the medium and long term? Or is the ‘old bottom billion’ debate still valid today considering that most low-income, and fragile countries are unable to fund poverty reduction initiatives and poverty likely to be a problem mostly in this group of countries?

Any estimate of whether or not the majority of poor people will continue to live in MICs is obviously complex and depends on a number of variables and assumptions. What we do know, however, is that the number of MICs has risen significantly in the last decade, a trend that is likely to continue according to recent estimates. What we also know is that countries have made very heterogeneous progress in reducing poverty when they reached higher income status. According to a recent UN report, the poverty incidence in MICs currently ranges from 2% to 60%. This is not to say that poverty reduction in poor and especially fragile countries is not an urgent problem, one that is likely to concern the development community in many years to come. What it means, however, is that distributional issues are as significant in characterising the poverty problem as the total lack of resources. The sharp reduction in the number of poor countries and the fact that the graduation process has, in many cases, been accompanied by stagnating poverty levels and increasing inequality, suggests that a better understanding of the specific characteristics and development challenges of the countries “in the middle” is necessary.

This changing geography of poverty and wealth has prompted a global rethink of development strategies in MICs – with each donor devising a different strategy. In 2011, The European Commission proposed a new development strategy – An Agenda for Change – which puts ‘differentiation’ at its core. The new policy introduces two significant changes: (1) new aid allocation criteria; and (2) differentiated development partnerships for different categories of countries. Differentiation will be applied in two stages of aid allocation: firstly, in terms of eligibility to bilateral development aid (this is new), and secondly, in terms of aid allocation at the programming stage. Under current proposals, the European Commission foresees the withdrawal of grant-based bilateral aid cooperation programmes with 19 countries that have either passed the upper-middle income (UMIC) threshold or account for more than 1% of global GDP – so-called ‘graduation’.

The European Commission’s new policy has met with plaudits and critics alike. Some argue that wealthier MICs have the capacity and responsibility to fund their own development, and that differentiation will improve the country poverty focus and aid effectiveness of European Commission development cooperation. The European Commission currently has projects in over 140 countries around the world, and spends a higher percentage of its development funds in MICs compared to other OECD countries.

However, others warn that the new policy does not adequately take into account people poverty and multidimensional poverty factors, as the proposed criteria heavily favour income indicators, which can mask significant differences in poverty levels, need and capacity. Analysis of people poverty data reveals that in 2009, the 46 DCI countries were home to an estimated 71% (954 million) of the world’s poor; with 56% (751 million) living in the 19 countries that are set to lose grant-based bilateral aid from 2014.

Against this backdrop its therefore essential to question, is a focus on national income the right proxy to decide on aid graduation? Can the prevailing paradigm – that aid only has a strong poverty focus if it is spent in the poorest countries – be maintained against the backdrop of persistent pockets of poverty in MICs? Does the EU have a responsibility for helping to tackle poverty and inequality in these countries? Or is it in the country’s own responsibility given that it is distributional challenges rather than the lack of financial resources that constitutes the primary obstacle to overcome widespread poverty? It is clear that MICs still face significant developmental challenges, with particular problems surrounding equitable distribution of the benefits resulting from recent years of economic growth. It is thus imperative that researchers and policy-makers alike make informed decisions on the issue – guided by evidence and not by ideology. At the European Development Days conference this year, we will be hosting a panel debate that sets out to debate these important questions.

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2 Responses to “The differentiation debate: Does the EU have responsibility for helping to tackle poverty and inequality in middle-income countries?”

Trackbacks/Pingbacks

  1. The differentiation debate: Does the EU have responsibility for helping to tackle poverty and inequality in middle-income countries? « The FRIDE blog - October 17, 2012

    […] You can find the rest of the article here. […]

  2. The differentiation debate: Does the EU have responsibility to help tackle poverty and inequality in MICs? « European development cooperation - November 2, 2012

    […] nature of these changes and how exactly the EU should respond to them. Svea Koch and Siân Herbert note that it is imperative that researchers and policy-makers alike make informed decisions on the issue […]

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