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The economics and developmental impact of policies including Brexit, trade, agriculture, environment, education, social mobility, and risk management; policy development in the EU and G20
Ian Mitchell is a senior policy fellow at the Center for Global Development in Europe. He is also a research associate at the Institute for Fiscal Studies. As of late, Mitchell has undertaken research on the economic impact of Brexit, the value of the EU Single Market, and the impact of Brexit on development in relation to trade and aid.
Until 2016, Mitchell worked as an economist and senior civil servant in the UK government. At the Department for Environment Food and Rural Affairs (DEFRA), he was Deputy Chief Economist and was responsible for economic analysis on EU, agricultural and environmental issues—including advising Ministers on the UK’s strategy on the EU Common Agricultural Policy. Between 2014 and 2015, he chaired the Agricultural Markets Information System established by the G20 to mitigate global food commodity volatility. At DEFRA, Ian was also responsible for the UK’s economic analysis on food & resource security and animal disease risk & outbreaks.
From 2004 to 2008, Mitchell undertook economic analysis on education and social mobility at the UK Department for Education. He and his team helped design, and led the evaluation of, reforms to higher education including the introduction of tuition fees. This included projecting participation and annual budgets over £8bn ($12bn) and assessing impacts on equality. He undertook new research on social mobility in the UK using both income and broader measures of well-being. Mitchell’s career began at Ernst and Young and has also included roles at HM Treasury and the Centre for Economics and Business Research.
While the UK negotiates its exit from the EU, the EU will be negotiating over its own budget for the period from 2020-2026 as part of the Multi-Annual Financial Framework. So, where will EU development aid be a quarter of the way through the 21st century?
The EU has publicly recognised that its members failed to meet their 2015 commitment to give 0.7 percent of Gross National Income (GNI) to development. The EU notes “the economic crisis and severe budgetary pressures in most EU Member States meant that the EU did not meet this ambitious target in 2015.” The latest (provisional 2015) figure for the EU is 0.47 percent of GNI; countries divide up as below:
Level of Development Assistance
Poland; Slovakia; Czech Republic; Spain; Greece; Slovenia
Between 0.15% and 0.5%
Portugal; Italy; Austria; Ireland; France; Belgium
Between 0.5% and 0.7%
UK; Netherlands; Denmark; Luxembourg; Sweden
Source: CGD analysis; OECD Development Assistance Committee data 2015 (provisional). Excludes non-DAC members Bulgaria, Croatia, Republic of Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, and Romania.
The financial crisis clearly triggered in-built counter-cyclical spending in EU member states and made increases in Overseas Development Assistance (ODA) difficult on a practical budget level. Still, the financial crisis was eight years ago, the Greek debt crisis is in abeyance, and the European Commission expects steady if unspectacular economic growth of 1.6 percent in 2017 and 1.8 percent in 2018. Longer-term estimates (like those from USDA) see EU (less the UK) output in 2026 being 17 percent higher in real terms than in 2016. Giving up just 1 of that 17 percent for development would smash the target—taking ODA to some 1.2 percent of GNI in 2026. This undermines the argument that hitting 0.7 percent of GNI is fiscally impossible. The target is fiscally possible over time, and few leaders have wanted to openly reject the target, even if few have taken decisive action to move toward it.
So, what progress should the EU aim for on aid volumes by 2026?
The EU faces ongoing policy challenges around the Euro, migration, security, and a simpler, more affordable agriculture policy (which, at €60bn in 2017 will still account for almost 40 percent of the budget).
For most EU member states, the national share of Brussels spending on ODA is a significant determinant of their national ODA levels. So the EU budget allocation for ODA is important. Recent regional pressures on migration have pushed up ODA, with the 2017 budget allocation reaching an extra €735 million over the MFF projections. This was a victory for campaigning groups such as ONE, but can the trajectory be sustained? After Brexit budget decisions will be taken without the UK—traditionally one of the strongest advocates for higher ODA levels in the EU budget.
However, EU leaders have shown leadership in making commitments to invest in the world. Last May, the European Council (i.e. the heads of member states) reaffirmed its commitment to reach this target “within the time-frame of the post-2015 agenda”—that is, by 2030. EU members will therefore need to make substantial progress in the period to 2026. Drawing a straight line from its current ODA spend to that commitment in 2030 would mean EU ODA of 0.64 percent in 2026. This would raise the EU’s collective aid contribution by some €25bn, to almost €75bn Euros per year (based on current EU GNI levels but excluding the UK).
Alongside the overall approach to aid volume, the EU will also need to consider related issues like how to revise the Cotonou Agreement (which covers the EU’s relationship with 79 countries from Africa, the Caribbean and the Pacific) including whether to bring the European Development Fund into the EU budget (and therefore compulsory) rather than as part of Cotonou as now.
How would additional aid funding be spent?
An extra €25bn annual on development could achieve massive impact on development. Whilst EU members fund development projects directly, the European Commission has well-established channels for spending this money, and those channels are more effective than most casual critics contend. EU institutions scored well in DFID’s recent aid review, and in Brookings and CGD’s Quality of ODA scoring. Unlike most multilateral agencies, the EU is able to combine aid with trade, diplomacy, and security support. The EU External Action Service should be ideally situated to deliver coordinated aid through 'joint programming,’ especially since developing countries are crying foul on the failure of donor countries to deliver their harmonisation commitments under the 2005 Paris Declaration.
Still, the Commission will need to think about how it can ensure that additional aid is spent effectively, with a stronger focus on results and minimal bureaucratic knots. Most of all, Brussels will need to show that aid can be spent visibly, in a way that enables member states to show they are addressing tangible global problems, rather than just pouring tax-payer money into an EU institution. We will be exploring such opportunities in the coming months.
In conclusion then, the UK’s departure from the EU will create a short-term financing pressure on the EU institution aid programmes—but EU leaders’ commitments in the next financial period could lead to substantial extra resources for development if promises are kept.
Outside the EU, the UK Government would need to find a new home for the £1.3bn or so of Official Development Assistance that it currently directs through European Institutions every year. Priti Patel, the new UK Development Secretary has already indicated she expects funding to be used “cost-effectively, transparently, and with a proper focus on results and impact.” This post looks at the broad options, and where that aid might be best-spent.
The UK is the world’s second largest aid donor (OECD DAC, 2014), and our recent blog post noted that almost 10 percent of that budget is spent via EU institutions. This is part of the UK’s commitment to spend 0.7 percent of national income on development. There are myriad proposals to reallocate £1.3bn in eye-catching ways, and there could well be a scramble amongst specialist NGOs and lobby groups to prioritise particular topics, but here we aim to take a more strategic look.
Drivers of choice
There will be an appetite to show that aid can be spent with more development impact than the EU achieved, and with more co-benefits for UK interests. UK officials will also be mindful that they rely on the EU to channel aid to countries where the UK does not have bilateral programmes, but which are historically important to the UK (e.g. small island states in the South Pacific or Caribbean) or where political relationships are strained (e.g. Eritrea). Constrained staffing levels for DFID and other UK Departments will also shape decisions.
We see six broad options:
1. The EU option.
First, the UK could continue to allocate funding to EU institutions (that is, the European Commission or the European Development Fund, or successor funds). This isn’t suggesting the UK stays in the EU and there’s no precedent for non-EU members contributing directly but this could be an area where the UK could continue to contribute to the EU’s budget (for example, as part of a deal on market access).
How effective is current EU spend? EU institutions (in red and blue below) scored well using the most recent Quality of ODA (QuODA) assessment by the Brookings Institute and CGD (which we hope to update it next year). Still, the World Bank (IDA in Green) scored more strongly, especially on transparency & learning and fostering (recipients’) institutions.
Figure 1. How effective is current EU spend?
Spending via EU institutions may also mean the UK retains its influence over the rest of the €10bn the EU spends. This would likely shape those funds towards poorer countries, improve transparency and learning (including impact and results) but perhaps hold the EU back from better coordination (where the UK has been a blocker on “joint programming.”)
A second alternative then would be to channel more funds to multilateral agencies such as the World Bank, GAVI, or UNICEF. The UK’s share of ODA via multilateral agencies dropped to 37 percent in 2015, below the OECD average of almost 40 percent. The UK has traditionally placed a high weight on multi-lateral spending which also has the feature of minimising administration costs in DFID. A potential downside of this approach is that the “mutually beneficial” nature of the aid is less visible but it may actually be the most effective in reducing poverty. The UNDP scores lower and more unevenly on effectiveness, but is an attractive channel where sensitivities put a premium on political neutrality. In terms of the Brexit vote, parts of the Leave campaign suggested strengthening links to the Commonwealth. Still, a poor way to achieve that would be via The Commonwealth Secretariat (Comm Sec) which scored badly in both 2013 and 2016.
Figure 2. Performance of Multilateral Development Review
agencies and groups
3. Expand the geographical scope of bilateral programmes.
A third idea is that the UK might extend the geographical footprint of its bilateral programmes to cover more developing countries. Given the issues with aid fragmentation and coordination that already exist (see OECD), it’s hard to see the case for this, though having an extended DFID or foreign office presence could enhance the UK’s influence, or “soft power.”
4. Use bilateral aid to cover EU withdrawal.
A fourth option is a variant of the third. The UK could direct its funding into countries and programmes the EU pulls out of following loss of UK ODA. Whilst mimicking EU spend is unlikely to appeal to Ministers, it’s likely there will be some countries—potentially Commonwealth African ones—that will lose EU funding in programmes that are well-established and providing strong value.
5. Business investment.
A fifth option is to substantially increase the volume of ODA devoted to business investment. An obvious vehicle for this would be via CDC, the UK Development Finance Institution. The Government is raising the ceiling on what it can invest via this route. A full discussion is beyond this blog but our view is that such an investment should be based on its merits not arbitrarily capped by a legislative ceiling set in 1999, nor dictated by a Treasury target for spend that doesn’t score as public borrowing. CDC should also offer the same transparency and scrutiny as the UK’s other aid spend, including featuring in future aid reviews. DFID has traditionally allocated funds designated as ‘capital’ to CDC, but there is no reason why CDC could not receive ordinary grant funding as well. But there are caveats: it may be difficult to achieve key development targets (e.g. public health, climate adaptation) using business investment alone. A substantial role for continuing grant aid is likely.
6. New strategic initiatives.
Finally, the UK could strategically prioritise new areas or substantially strengthen existing areas for additional funding. One could write a 6-month review on that question alone, but there are some strong potential candidates based on the UK’s comparative advantages and national interest which have the potential to address global and development challenges.
Global leadership on public goods – the UK could catalyse major new global initiatives, for example on climate, disease mitigation/ control, transparency, or pre/ post-conflict security
New UK priorities – for example, building humanitarian aid capability, funding family planning, trade for development, funding tax capability, expanding cash transfers
Give the choice to tax-payers – a more radical choice wold give UK taxpayers direct control over which NGOs received the additional ODA. CGD colleagues have proposed “AidChoice” which would shift funding towards eligible charities and away from bi or multi-lateral channels
With any repatriated EU money unlikely to actually arrive until 2019 at the earliest, now is the point in the policy cycle for radical and innovative thinking followed by prioritisation, and more careful appraisal. CGD will be articulating some of our ideas in the coming weeks.
In conclusion then, the six broad options are not mutually exclusive and offer a choice between effectiveness, for example through multi-lateral funding; influence over Europe’s substantial funding; or potentially riskier but more distinctive new priorities. If UK ministers are attracted to new areas, they will need to use the lead-time for the extra funding to spend well and not make decisions on the hoof in 2019 to ensure aid spend works for both recipients and the UK.
 DFID Statistics on Development 2016 Table 8 - £935m to the European Commission Development budget and £392m to the European Development Fund in 2015
The EU faces a substantial drop in its development resources following Brexit. Still, the amount will depend on how “hard” that exit is, and the UK’s ongoing involvement in voluntary EU-level arrangements. Here we assess the potential size of the Overseas Development Assistance (ODA) funding drop that EU institutions could face.
At the UN General Assembly, Theresa May already confirmed that the UK will continue to “honour its commitment” to spend 0.7 percent of national income on development. However, following Brexit, this aid may be spent very differently, particularly the 9.8 percent of UK aid spent via EU institutions in 2014. One short-term change is that UK Sterling contributions to the EU are likely to see a steep increase over the next two years before full Brexit since the EU budget is assessed in a strengthening Euro.
But what about after Brexit? The EU itself is a major contributor to development—together its members are the largest aid donor and account for over half of the total $132bn development aid in 2015. The EU’s institutions (see below) are responsible for around a fifth of total EU aid spent (so over 10 percent of all aid). Of course, EU members’ trade, environment, migration, finance, and other policies also have a significant bearing on poverty and development—and CGD considers these in our Commitment to Development Index—but aid is a critical element.
Without the UK, the EU would need to cope with significantly reduced funding on development. Funding flows through two main channels: directly, under the EU’s Global Europe budget, and via the European Development Fund (EDF), which sits outside the EU’s budget.
EU Institutions Overseas Development Assistance, 2014 (€bn)
Total EU Institutions10.01.414%Of which:
EU budget including 'Global Europe'
European Development Fund (EDF)
Sources: Author's calculations, OECD Development Assistance Committee data.
*This share may alter from year to year. In 2013, the UK share was 15 percent in all three categories.
The main UK contribution is via the EU budget ‘Global Europe’ heading which includes development assistance and humanitarian aid beyond the EU, including to potential future EU members. Total EU ODA spending was €6.9bn in 2014 (some 5 percent of EU total spend). In a “hard” Brexit, where the UK makes no EU budget contribution, this would reduce the EU (ODA) budget by some €1bn, or 13 percent. Without the UK, the EU would need to decide whether to seek higher contributions from other members, reduce activity, or to salami slice funding across programmes.
The European Development Fund (EDF) received €0.4bn from the UK in 2014. The fund is outside of the EU budget and so is effectively voluntary. The UK is a major funder—contributing around an eighth of total funds—so the UK’s absence would have a significant impact. Over 95 percent of EDF spend is on African, Caribbean, and Pacific (ACP) countries. This originated from the colonial ties of the main funders and the UK has used its influence to focus funding on the poorest countries. Denmark and the Netherlands have argued for the EDF to be formally part of the EU budget to provide greater predictability in the funding. That proposal will be considered in the EU’s forthcoming negotiations on the post-2020 budget and could in principle lead to new funding from, for example, more recent EU members. The four accession states for which (OECD DAC) data are available each contributed less than 0.13 percent of GNI in ODA, and a combined €73m to the EDF in 2014.
A third funding route is via the European Investment Bank (EIB) where the UK holds around a sixth of the capital (and no ongoing budget commitment). Currently, only EU members can be shareholders. The UK recorded ODA of €28m and €25m via EIB in 2013 and 2014. The UK’s roles in the European Bank for Reconstruction and Development (EBRD) and the Council of Europe are not dependent on EU membership.
Finally, the UK contributes voluntarily to EU trust funds established for particular purposes, for example in response to the Syrian crisis. This funding is more ad-hoc but OECD record additional UK contributions to the EU (“non-core”) which average roughly €50m since 2010.
In summary then, in a “hard” Brexit, EU institutions ODA spend would be at least €1bn lower and could be reduced by more than €1.4bn, or 14-15 percent. This raises a number of questions: will future generations of aid watchers look back on this change as a landmark, or as a minor accounting adjustment? For the EU, how should it reconfigure its development budget and spending without the UK? Are there risks that the quality of EU aid will decline? Or are there opportunities to see improvement?
Similarly, for the UK, what are the alternative options to spending via EU institutions? Many Brexiteers are trumpeting that the UK will spend the aid more effectively—what are the prospects? How do the various EU vs UK options score in terms of a common scale like the Quality of ODA Assessment?
Given the size of the funding involved, these are major questions that CGD will be exploring as part of our ongoing work on the issues and opportunities for development beyond Brexit.